SIE Exam Prep

red herring

a preliminary prospectus distributed to prospective investors in a new issue of securities

The maximum annual contribution in a Roth IRA is A) $2,000 B) $5,000 C) $6,000 D) $1,000

$6,000

According to FINRA rules, IPOs may not be sold to A) Affiliated persons B) Qualified institutional buyers C) Restricted persons D) Control persons

(1) A member or a person associated with a member may not sell, or cause to be sold, a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted herein.

A correspondence includes any written communication that is distributed or made available to A) More than 25 retail investors within any 30 business-day period B) More than 25 retail investors within any 30 calendar-day period C) 25 or fewer retail investors within any 30 calendar-day period D) 25 or fewer retail investors within any 30 business-day period

(2) "Correspondence" means any written (including electronic) ... or made available to more than 25 retail investors within any 30 calendar-day period.

OTC Quotation Facilities 2. On OTC venues MM quotes may be 1-sided or / 2 sided?

(unlisted equity securities) -OTC Pink -No listing requirement -Companies not required to be SEC filers -OTC Bulletin Board (OTCBB) -No listing requirements -Characteristics of OTC Securities -less liquid, sepculative, volatile 2. either

tender offer

- A tender offer is an offer by the issuer (share buyback) or an outside investor (takeover) to purchase at least 5% of the company's shares directly from company shareholders. 1. Price - Typically a fixed price at a premium to current market price "All holders best price" 2. Net long - Must be net long to tender shares 3. Conditional - The tender offer may be conditional or qualified and require a minimum number of shares

market-maker

-A firm who stands ready to buy or sell a specific security or securities at all times at publically quoted price -default is 100 shares = round lot -market makers can fill orders as: Brokers or Dealers must post its firm 2 sided quotes at c. (9:30am-4:00pm) -market makers who fail to honor a firm quote has engaged in: backing away.

Shelf Registration

-A shelf registration is valid for up to three years and can be used for follow-on offerings, but not IPOs. 1. Pre-Registration (Pre-Filing/Quiet Period) 2. Cooling Off/Waiting Period can sit on shelf for up to 2 years -can use for follow on offerings 3. Post-Effective

Rule 144 - Restricted Stock

-Allows holders of unregistered securities to sell to the public Who sell? holder of unregistered stock sell their shares How much? Unlimited How often? After 6 month holding period Limitation? The company must already be public

Rule 144 Sale Control Stock

-Allows insiders to sell their holdings of company stock Who Sells? Holders of control stock 1. Officers (CEO, CFO) 2. Board members 3. >10% large shareholders How much? The greater of: 1. 1% of the outstanding shares or 2. The average weekly trading volume in the four weeks prior to the sale How often? Once every 90 days

Raising Capital

-Businesses can raises capital by selling securities -But an offer or sale of any security must either be: 1. Registered with the SEC 2. Conducted under an exemption

Federal Reserve and Economic Policies: Classical Economics, Keynesian Theory, Monetarist Theory

-Classical Economics -founded by Adam Smith. -Laissez Faire Economics - no govt interference w market -Keynesian Theory (Fiscal Policy/Congress) says that we're able to use government spending and tax policy to impact the economy. -And monetarist theory, (Federal Reserve) -uses money supply to affect the economy -Discount rate - the rate that banks can borrow? -Open market operations where they're buying and selling treasuries, putting cash into the economy or pulling cash out of the economy. -And the bank reserve requirement How much money banks have to have on reserve.

Securities Act of 1933

-General Rule: Securities must be registered for lawful public sale, unless exempt -Register by filing a registration statement that provides disclosures to investors -What's disclosed? -The issuer's business description and details -The issuer's insiders - the officers (eg CEO), board members, and >10% shareholders -The underwriters and legal cousnsel -The amount and planned use of the proceeds -Any legal proceedings against the issuer -Audited financial statements

Buying Common Stock IPO Shares

-Initial public offering (IPO) shares must be sold to the public FINRA prohibits restricted persons from investing in common stock IPOs: 1. Broker Dealers can not buy IPO stock 2. Employees of broker-dealers 3. Immediate family member of broker-dealer employees (Spouse, siblings, parents, in-laws) Acceptable purchasers: 1. Extended family members

Market and Limit orders Whats the risk you take when entering a limit order?

-a market order is immediately executed at the best available price during normal trading hours, 9:30am to 4:00pm - Guarantees execution, but not at a specific price -A limit order will only execute at a specified price or better -Buy limit $15 "Buy for $15 or less" -Sell limit $40 "Sell for $40 or more" A Non-execution

Exchange Rates

-how much one currency is worth in the terms of another currency -Purchasing power parity: helps determine is an exchange rate by comparing how much it would cost to buy the same basket of goods in different currencies. -Who wants a strong US Dollar - us importers & foreign exporters -Whereas weak dollars are desired by US exporters and foreign importers. -what happens to the US dollar in periods of moderate inflation? signal of strong and healthy economy expect some inflation And when interest rates rise, what happens to the US dollar? -It strengthens -if we have rising interest rates, makes treasuries more attractive to people worldwide will cause inflows to the US dollar, strengthening it.

Securities Investor Protection Corporation, or SIPC

-not for profit corporation protecting against the losses of cash and securities held by a brokerage firm in the event of the firms failure -market losses -inappropriate recommendations -fraud by issuers (ponzi) -currency and commodities -$500k coverages of which $250k is cash -if claim exceeds 500 become general creditor to BD -value of securities that bankruptcy was filed SIPC date -individual account examples: -up to 250k coverage in cash held in account -also get up to 250k cov of securities

How accounts are protected, by the protections afforded by the FDIC and the SIPC, the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation

-temp hold of up to 15 days -make reasonable efforts to include name contact number of trusted person

what makes a transaction discretionary

-the customer's giving trading authorization to a registered rep (RR) or another securities professional. -registered rep able to place trades in the client's account, on the client's behalf, that is to say, without communicating explicitly with the client about that trade, they can do so by delivering a power of attorney to the firm. what asset to buy or sell, what stock or bond or mutual fund. What amount of my capital to deploy -RR can decide price and time of execution for client without discretion

If a market maker is quoting B 92.16 x A 92.24 for a security 1. At what price must the market maker sell? 2. At what price must the market maker buy? 3. if client places a market order to buy, at what price will it be filled? 4. If client places a market order to sell, at what price will it be filled?

1. 92.24 2. 92.16 3. 92.24 4. 92.16 market orders trade against a MM's quote _Buying client -> Selling MM (offer/ask) -Selling client-> Buying MM (bid)

Account types and account titles

1. Cash account -you pay for your securities in full -don't need any special documentation -not gonna be borrowing money 2. Margin Account -purchase securities with a portion of borrowed money -addition to opening up your new account, sign the margin agreement 1.hypothecation agreement -where you pledge the securities in the account as collateral for any loan that you make 2. agree to the terms of the loan when I signed the credit agreement 3. Could potentially sign the loan consent agreement, which allows the broker dealer to lend my securities to other customers. 4. receive a margin disclosure document details risks associated with margin

Market Protection Are the following statements True or False? 1. A firm can increase its inventory in a stock ahead of a research report being published on that company. 2. An investor can hype up the value of a company to inflate its stock price so the shares can be sold at a profit 2. A trader can enter orders to push prices higher or lower, with no intent of actually executing at the quoted price.

1. F Trading ahead of research reports 2. F- Pump and dump 3. F- Spoofing

Interest rates in Marketplace from low to high 1. Federal Funds Rate 2. Discount Rate 3. Broker call rate 4. Prime rate

1. Federal Funds Rate - Lowest -This is the rate that banks charge each other for overnight loans. 2. Discount Rate - bank to bank. -The rate that the Federal Reserve charges banks for short-term loans. 3. Broker call rate - what a broker-dealer borrows money from a bank that it's going to turn around and re-lend to its customers in the form of margin loans. 4. Prime rate - Hightest the rate that banks charge their most credit-worthy institutional customers.

Underwriting timeline

1. Pre-registration: issuer hires UW (investment bank) that prepares registration statement - NO gun-jumping/discussing marketing of deal ---File registration stmt w SEC--- 2.Cooling off ~20 days: SEC reviews registration statement (red herring), UW market deal - NO sales only IOIs ---Effective Date--- 3. Post-Effective: UW sell shares, Prospectus: Delivered to all investors who buy IPO (and any investors who buy on exchange for first 25 days) next morning shares trade on exchange

Market Protection Are the following statements True or False? 1. A trader may split a customer's order into multiple small orders for best execution 2. A trader can split a customer's order into multiple orders to increase commisions 3. A firm may pay an investment website to discuss a security it makes markets in. 4. An issuer may make reasonable payments to a firm in exchange for the firms publishing quotes and serving as a market maker.

1. T - Order splitting 2. F - Trade shredding 3. F- Market manipulation Firms cannot give anything of value to the media to influence the price of a security 4. False - no payment for market-making

Currency Strength Would the following party want a strong or weak dollar? 1. A US food producer that exports that majority of its crops (earns FX) 2. A foreign company that imports goods from a US supplier (Earns FX) 3. A foreign oil company selling into the US market (Earns USD) 4. A US company that imports goods for resale in the US (Earns USD)

1. Weak 2. Weak 3. Strong 4. Strong

Lifecycle of a Trade

1. customer places order 2. BD receives order - fills as dealer (from inventory) or as broker (finds counterparty) and earns fee (mark up/down or commission) 3. Execute (T) trade report 4. Settle (T+2) buyer delivers cash, seller deliver securities and customer receives TRADE confirm (which must go out ON or Before settlement date)

Timeline for Opening an Options Account

1. firm performed diligence on customer 2. provide disclosures (ODD) Options Disclosure Document 3. approve account Reg options principal (S4) -after account approved customer can trade options -if fail to return signed agreement can only do closing sales 4. return signed account agreement -within 15 days

The new account process

1.New account form -rep's gonna confirm the information I delivered over the telephone with me. 2. Who approves who signs -need an approval and signature. -only requires a principal signature. -a principle approves and signs that new account form, indicating that the new account meets all the requirements of the firm to be brought on board as a new client -The rep, interestingly does not have to sign, -the client interestingly does not have to sign under the FINRA rules. 3. Request for Verification -customer verifies info correct 4. Reverify -re-verify info within 30 days of opening with client

a customer who bought 10 Ogden 5's at 93 would receive an annual interest of

500 dollars. 5 represents interest of 5% of par value or .05x1000 which equals 50 in annual interest per bond x 10 = 500 in annual interest

Which of the following statements regarding stop orders are true? A) Buy stop orders are typically used to protect a long stock position B) All stop limit orders are guaranteed to be executed C) When a stop order is triggered, it becomes a market order D) Sell stop orders are typically used to protect a short stock position

A buy stop order is most commonly thought of as a tool to protect against the potentially unlimited losses of an uncovered short position. Sell-stop orders protect long positions by triggering a market sell order if the price falls below a certain level. Buy-stop orders are conceptually the same as sell-stops except that they are used to protect short positions. One key advantage of using a stop-loss order is you don't need to monitor your holdings daily. A stop order also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price.

Securities Exchange Act of 1934

A federal law dealing with securities regulation that established the Securities and Exchange Commission to regulate and oversee the securities industry. Secondary Market -Exchange trading (NYSE/Nasdaq) -OTC trading -Market Making -Broker Dealers

If the Federal Reserve determines that a tight money policy is necessary, all of the following are likely EXCEPT A) Interest rates will fall B) Stock prices will fall C) Bond prices will fall D) The exchange value of the dollar will rise.

A interest rates will fall

An entity that buys and sells securities for its own account on a regular and continuous basis at a quoted price and for a minimum size is defined as a(n) A) Agency trader B) Market center C) Block positioner D) Market maker

A market maker is an individual participant or member firm of an exchange that buys and sells securities for its own account. Market makers provide the market with liquidity and depth while profiting from the difference in the bid-ask spread.

asset allocation fund

A mutual fund that spreads investors' money across stocks , bonds, money, market securities, and possibly other asset classes.

Stop Orders 1. "Sell stop $40" 2. Buy Stop $15

A stop order is a 2 step process: 1. A trade occurs at or through the stop price, then 2. The order become a market order for immediate execution 1. Activation any trade at or through $40 Used: to protect long positions 2. Buy Stop 1. Activation: Any trade at or through $15 2. Execution: Becomes a market order Used to protect short positions

Which of the following items would least likely appear on an order memorandum? A) Solicited or unsolicited B) Customer name C) Customer account number D) Use of discretion

A) Solicited or unsolicited

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 A) closed end fund B) open end fund C) certificate of deposit D) unit investment trust

A) closed end fund

Fees and Commissions 2. When assessing a commission mark-up, or mark-down firms must: A Be fair and reasonable B. Charge all clients the same fees C. Deliver their services at cost. D. Charge less than 5%.

A. Be Fair and reasonable Fees must be fair and reasonable FINRA's 5% policy is a guide (but not a rule)

Call options can be beneficial if an investor A) is unsure about the future direction of the stock market B) seeks to hedge a long position in a security C) is trying to protect a short position in an equity position D)wants to ensure he'll be able to sell a particular stock at a specific price

A. 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.

Which of the following items may a firm not consider when charging a commission or mark-up to a customer? A) The expense involved in filling the order B) The dollar size of the trade C) Staffing levels of the firm D) The firm's right to make a profit

All of the following should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction EXCEPT: a. The costs involved in executing the trade b. The dollar value of the security c. The cost price of the securities held in inventory by the dealer d. The availability of the security call of the choices given should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction except the cost price of securities held in inventory by the dealer. The price charged should be based on the current market price, not the cost of the inventory position. (12-3)

All order memorandums must be approved by a supervisor A) With 24 hours of receipt. B) Promptly after order execution. C) Promptly after receipt. D) As soon as is practical.

All orders, including those for discretionary accounts, must be reviewed and endorsed promptly, but not before execution.

net asset value

Amount that one share of a mutual fund is worth

The primary purpose of an Electronic Communications Network (ECN) is to A) Facilitate orders between two stock exchanges. B) Permit market makers to negotiate the price of a trade on behalf of a client. C) Allow market makers to report trades on a timely basis. D) Automatically match their client buy and sell orders.

An ECN is an automated system that publishes orders entered by market participants directly to third parties and individual traders. Those orders are then automatically executed by matching buy and sell orders at the best price available. ECN trading is an extremely efficient process using sophisticated technology.

An investor is interested in purchasing an interest in a bond fund at a price below the asset value of the portfolio holdings. Which of the following investments may be appropriate for this investor?

An Investment grade corporate closed-end fund Closed-end fund and ETF shares trade on exchanges at premiums or discounts to their NAV. An investment grade corporate bond CEF trading at a discount to NAV fits this investor's objective. A DJIA ETF is a stock fund.

Reg D (private placement)

An exempt transaction under the Securities Act of 1933 for private placements A way for companies who have already gone public to raise additional capital without registering their securities 1. Who raises capital? Any business 2. How much? Unlimited 3. How Often? No Limit 4. Who can invest? Any accredited investors and up to 35 non-accredited investors -Can a public company raise capital with a private placement? Yes -> a "PIPE" (private investment in public equity) -Who is accredited? 1. Officers and directors of the issuer 2. Insitutional investors with over $5 million in total assets 3. High-net-worth individuals -Net worth of at least $1 million (excluding home) or -Income of at least $200k ($300k if married)

Rule 144A

An exemption to the holding period and volume restrictions of Rule 144 for qualified institutional buyers (QIBs)

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

Unit Investment Trust (UIT)

An investment company that sells redeemable shares in a professionally selected portfolio of securities. It is organized under a trust indenture, not a corporate charter.

speculation

An involvement in risky business transactions in an effort to make a quick or large profit.

variable annuity

Annuity that has a varying rate of return based on the mutual funds in which one has invested

A company's stock that is trading at $0.15 per share would typically be quoted on which platform? A) AMEX B) OTCBB C) NYSE D) Nasdaq

Answer Explanation: Micro-cap, penny stocks, and shares of companies in bankruptcy typically trade on the for Over-The-Counter Bulletin Board (OTCBB) as they do not meet the listing requirements of exchanges such as NYSE, Nasdaq, and AMEX. The OTCBB is an electronic, regulated quotation service that displays real-time quotes, last-sale prices, and volume information in over- the-counter equity securities.

The terms and conditions of the public offering and the agreement between the issuer and the underwriting manager are formalized in a contract known as the A) Syndicate Letter. B) Underwriting Agreement. C) Selected Dealer Agreement. D) Agreement Among Underwriters.

Answer Explanation: The Underwriting Agreement defines the terms between the issuer and the underwriting manager in a public offering.Textbook Reference: See section 12.2

What best describes an economic policy that seeks to drive growth by increasing government spending? A. Fiscal Policy B. Monetary Policy c. Laissez- Faire d. Classical Policy

Answer: A. Keynesian Theory (Fiscal Policy/Congress) says that we're able to use government spending and tax policy to impact the economy. -Monetarist theory, (Federal Reserve) -uses money supply to affect the economy -Classical Economics -Laissez Faire Economics - no govt interference w market

If policy makers are aiming to increase the money supply what goal are they most likely pursuing? A. raise more tax revenue b. increase interest rates c. control inflation d. stimulate growth

Answer: D. Stimulate growth, So we have policy-makers using monetary policy seeking to increase the money supply. Well, hopefully if we put cash into the economy, into the hands of the people, that will stimulate growth. - lower the discount rate. - Make it cheaper for banks to borrow money, which will in turn, make it cheaper for people to borrow money. -The fed could engage in quantitative easing and buying treasuries. -When the fed buys treasuries from the banks that puts cash into the hands of the bank who will in turn, put that cash into the hands of the people. -Or lower the bank reserve requirement which would allow banks to hold less cash on their books and take that cash and lend it out. - People can start businesses, they can hire more people, they can invest.

market protection question A market participant who buys a security in one market and then immediately resells it in another market for a profit has engaged in which of the following activities? A. Arbitrage, a prohibited form of market manipulation B. Arbitrage, a permitted trading strategy C. Trading Ahead, a prohibited form of market manipulation

B Arbitrage, a permitted strategy

Your client Rodney tells you that he would like to have $300,000 available in several years to pay for his young children's college education. You might advise Rodney to think about building a portfolio that includes A) Large Cap fund B) Zero coupon bonds C) High grade corporate bonds D) Sector funds

B Zero coupon bonds

With statutory voting, A) An investor can pool his or her votes together and cast the votes as they wish B) An investor can vote once per share for each seat on the board of directors C) All stock holders must cast their votes based on guidance provided by the board of directors D) An investor must cast his vote in person, rather than through an absentee ballot

B) An investor can vote once per share for each seat on the board of directors

When a bond is traded between two coupon dates, A) the buyer and the seller will negotiate the exact amount of accrued interest to be paid. B) the buyer will pay the seller accrued interest. C) the seller will pay the buyer accrued interest. D) the buyer and seller will each receive half of the next coupon payment.

B) the buyer will pay the seller accrued interest.

Trader R hears news from an underwriter that his firm will be buying a large block of XYZ Co stock. If R buys shares of the stock before the news is made public, he is engaged in A) Rumoring B) Front-running C) Insider trading D) Bid-rigging

B) Front-running

All of the following are associated with new issues of revenue bonds EXCEPTA) Backing by fees raised from a specific projectB) Voter referendumsC) No limitations on taxing authorityD) Backing from a private corporation

B) Voter referendums Answer Explanation: Voter referendums are required in many new issues of general obligation bonds. They are not required for revenue bond. Revenue bonds are backed by user fees, or potentially by fees paid by a private corporation for the use of the facility. Revenue bonds are not subject to limits on the taxing authority of the issuer.Textbook Reference: Please see textbook section 3.4.2

Mrs. Jones invests in a limited partnership that generates $9,000 in passive losses. She is permitted to deduct these losses against A) either passive income or investment income B) passive income only C) disposable income D) earned income

B) passive income only

Which of the following best characterizes a Regulation D offering? A) A public offering of securities by a blue-chip company to wealthy investors. B) An unregistered offering of securities made primarily to accredited investors. C) A registered offering of securities made to mostly retail investors. D) An unregistered offering of securities made exclusively to sophisticated investors.

B. An unregistered offering of securities made primarily to accredited investors Regulation D is a private offering of securities, which can include an unlimited number of accredited investors and generally a maximum of 35 non-accredited investors.

TANS, RANS, and BANS are issued by municipalities for A) Private purpose non-essential services funding B) Pass through financing C) Federally subsidized financing D)Short term financing

BANS, RANS and TANS are all short-term debt instruments (average of 1 year maturity) issued by municipalities for various projects. ... TANS are paid off by future taxes, such as for a public park or other project. BANS, TANS and RANS are all tax free like standard municipal bonds.

Order Types 1. When must the shares be delivered? 2. What shares will be delivered? 3. What will the short-seller do to close the position?

Buy Orders -Customer buys securities -Bullish Market view Long Sell Order -Customer sells securities she owns -Bearish market view or Profit taking Sell Short Order -Customer sells securities that she does not own -Bearish market view 1. T + 2 2. Borrowed Shares 3. Buy shares

All of the following sectors are considered cyclical EXCEPT

Correct Answer: Healthcare Explanation: The healthcare industry is considered a recession-proof (i.e. defensive) sector because it remains constant regardless of the ups and downs of the economy. Textbook Reference: Please see textbook section 10.2.5.1

Which of the following statements is true regarding the underwriting syndicate? A) All firms within the syndicate must be FINRA members B) All members of the underwriting syndicate act in an agent capacity C) The underwriting agreement specifies the terms by which all members of the syndicate are to abide D) It is a temporary group that is formed to distribute an offering

C) It is a temporary group that is formed to distribute an offering The underwriting syndicate is formed to distribute an offering and disbands after the distribution. The agreement that specifies the terms is the agreement among the underwriters. Members of the syndicate frequently act in a principal capacity as they purchase a share of the offering for their inventories. In corporate underwritings, syndicate members must be FINRA members, but in offering of exempt securities, FINRA membership is not required.

On the third Friday of the month, the strike price of an option contract is above the market price of the underlying common stock. In this scenario

Correct Answer: A put option would be exercised Explanation: A put option would be exercised when the market price of the underlying security is lower than the strike price of the option contract. Textbook Reference: See textbook section 6.3.1.1

Your clients the Baxters, recently retired, would like your advice on how to adjust their portfolio, now that they are in their mid- 60s. Their primary goal at this stage is capital preservation and the avoidance of high levels of volatility. You might suggest that they refrain from increasing their exposure to A) Large cap stocks B) High grade bonds C) Small cap stocks D) Money market funds

C) Small cap stocks Small-cap stocks have historically outperformed large-cap stocks but have also been more volatile and riskier investments.

When an individual receives a stock dividend,A) ordinary income taxes must be paid on the additional shares.B) the cost basis of the entire position is adjusted upward, with no tax liability for the additional shares upon receipt.C) the cost basis for the entire position is adjusted downward, with no tax liability for the additional shares upon receipt.D) the cost basis of entire position is unchanged, and a current year tax liability is created.

C) the cost basis for the entire position is adjusted downward, with no tax liability for the additional shares upon receipt.Answer Explanation: Upon receipt of a stock dividend, the investor must adjust the cost basis of the entire position downward, and there is no current tax liability incurred for the additional shares.Textbook Reference: Please see textbook section 1.7.4

AcquisitionCo launches a tender offer to purchase 10m TargetCo shares at a price of $22.5 per share. The shareholders of TargetCo collectively tender 100m shares of stock. If Emily, a shareholder of TargetCo, tendered 10,000 shares, how many of her shares will actually be accepted by AcquisitionCo? A. 10 shares B. 100 shares C. 1,000 shares D. 10,000 shares

C. 1,000 shares 10% of her shares will be accepted

A mutual fund is quoted at $16.56 NAV and $18.00 POP. The sales charge is A. 7% B. 7 1/2% C. 8% D. 8 1/2%

C. 8% 16.56 + = 181.44 16.56/18= 8%

An American Depository Receipt is best described as a security representing A) A US company trading abroad B) A US company trading in the US C) A foreign company trading in the US D) A foreign company trading in multiple countries

C. ADRs are U.S. dollar-denominated certificates that trade on American stock exchanges and track the price of a foreign company's domestic shares.

Transactions with individuals on the Specially Designated Nationals list: A) Must be placed on a broker-dealer watch list B) Are permitted but must be monitored by broker-dealer surveillance procedures C) Are specifically prohibited by federal law D) Must be recorded on the books of the FBI

C. 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.

Jeff has an investment objective of speculation. Which of the following securities is least likely to be held in Jeff's account?A. BB+ rated debentureB. ZZZZ Index call optionC. Baa2 rated school district bondD. Equity-linked note

C. Baa2 rated school district bondOf the choices provided, Jeff would be least likely to own a bond with a rating of Baa2, as this is an investment grade rating. The other alternatives would be considered riskier, or speculative, and would be consistent with Jeff's investment objective.

What is the calculation for determining the current yield on a bond? A) Annual interest divided by Par value B) Yield to maturity divided by Par value C) Yield to maturity divided by Current market price D) Annual interest divided by Current market price

Calculating Current Yield The current yield is equal to the annual interest earned divided by the current price of the bond. Suppose a bond has a current price of $4,000 and a coupon of $300. Divide $300 by $4,000, which equals 0.075. Multiply 0.075 by 100 to state the current yield as 7.5 percent.

Shares of an IPO become marginable A) 10 days following issuance B) 90 days following issuance C) 30 days following issuance D) 60 days following issuance

Can I purchase shares of an initial public offering on margin? Regulations governing IPOs state that new issues are not marginable for at least 30 days following pricing. Therefore, IPO shares must be paid for using cash or cash available to borrow.

All of the following are provisions of the Trust Indenture Act of 1939 EXCEPT A) It applies to issues of corporate debt securities in excess of $1 million B) If a bond issuer becomes insolvent, the appointed trustee may be given the right to seize the bond issuer's assets and sell them in order to recoup the bondholders' investments C) Issuers are required to create a written document that discloses the terms and conditions under which the securities are issued, including legal obligations and any restrictions D) Issuers must name a trust corporation to carry out the terms of the indenture

Congress passed the Trust Indenture Act of 1939 to protect bond investors. It prohibits the sale of any debt securities in a public offering unless they are issued under a qualified indenture. With the act, trustees are required to make a list of the investors available so they can communicate with each other.

Which of the following is most likely to fluctuate in value during a period of stable interest rates? [A]Cumulative preferred stock. [B]Participating preferred. [C]Senior preferred. [D]Convertible preferred.

Convertible preferred. Because convertible securities try to maintain parity with the Common Stock - Convertibles would fluctuate more than non-convertibles even when interest rates are stable.

All of the following statements about corporate bonds are true EXCEPT: A) They typically are issued with par value of $1,000 B) Interest is typically exempt from taxation at the state and local level C) They generally yield more than U.S. government and U.S. Agency securities D) Most bonds pay interest every 6 months

Corporate bonds are issued in blocks of $1,000 in face or par value. Almost all have a standard coupon payment structure. A corporate bond is taxed in three ways: 1. interest earned on the bond 2. through capital gains or losses earned in the early sale of the bond 3.through an original issue discount.

A variable annuity would be considered most appropriate for

Correct Answer: A 50 year old executive well positioned in his company pension plan and looking for additional benefits Explanation: The best candidate for a variable annuity is someone in middle age who is fully funding their retirement benefits and is looking for supplemental retirement income. Textbook Reference: See textbook section 12.3.3.6

Bond prices would be expected to rise as the result of

Correct Answer: A falling CPI. Explanation: When the CPI falls, suggesting slower economic activity, interest rates may tend to fall, causing bond prices to rise. Textbook Reference: Please see textbook section 10.2.1

our client Jessica will be making a down payment on an apartment in the next six months and will need $75,000 at that time. She currently has the full $75,000 in cash in her savings account and would like to invest it now, but be able to access these funds when needed. Which of the following investments should Jessica avoid?

Correct Answer: A variable annuity Explanation: The least liquid investment listed is the variable annuity. When investors need liquidity and have a short investment horizon, suitable products include money-market funds and investments in US Treasury securities - both are very safe and very liquid. By investing in these types of securities Jessica can be confident she will still have $75,000 in principal and will be able to easily and readily access it when she needs the funds. This one is about choosing the "best" answer. Even though REITs can be very volatile, because they are exchange-traded they do have liquidity whereas variable annuities do not. Textbook Reference: See textbook section 7.3.5

Company A and Company B are multinational corporations whose typical business interests are in the import/export fields. The international transactions in which these businesses engage might be financed through the use of:

Correct Answer: BAs Explanation: International transactions can be financed through the use of banker's acceptances (BA). These are typically checks drawn on a bank by an importer or exporter of goods and represent the bank's promise to pay the face amount of the note at maturity, which is usually within a three-month time period. Banker's acceptances are frequent investments in money market funds. Textbook Reference: Please see textbook section 3.6.3

A hedge fund in which the fund manager is given complete authority to decide on the assets in which to invest is a

Correct Answer: Blind pool fund Explanation: In a blind pool hedge fund, there is not disclosure of the investments that will be made. Textbook Reference: Please see textbook section 5.3.2

The pricing characteristics of REIT shares are most like those of shares of a

Correct Answer: Closed end fund Explanation: REIT shares trade in the secondary market at a discount or premium to their NAV like closed end fund shares. Mutual fund shares like growth funds or money market funds are redeemed by the fund at their NAVs. DPPs do not generally trade; there is an extremely limited secondary market for investors who wish to sell their interests. Textbook Reference: Please see textbook section 5.1.2

Which of the following securities carries the greatest amount of credit risk?

Correct Answer: Debenture Explanation: Credit risk is the risk of default on an issuer's obligations. Credit risk is only applicable if an investor is a creditor to the company. A debenture is the most junior bondholder in a corporation. Stockholders are not creditors. Textbook Reference: Please see textbook section 3.1.2.3

An entity engages in oil and gas drilling. Rather than paying income tax at the entity level, it flows through the tax consequences to its investors. It is a

Correct Answer: Direct participation program Explanation: A direct participation program (DPP) is characterized by the flow-through of tax consequences to investors. It may participate in oil & gas, real estate, agriculture, and other types of activities. Textbook Reference: Please see textbook section 5.2

When considering asset allocation, the three most common categories are

Correct Answer: Equities, debt, and cash Explanation: The three primary categories in an asset allocation plan are stocks, bonds, and cash/cash equivalents. Textbook Reference: Please see textbook section 7.5.1

The type of REIT which generates revenue for investors primarily through rents collected and sale of properties is a(n)

Correct Answer: Equity REIT Explanation: Equity REITS generate revenues primarily from collecting rents on property they own and also from the sales of properties they have held. Textbook Reference: Please see textbook section 5.1.4

In an IPO, what does a secondary offering refer to?

Correct Answer: Existing shareholders selling shares to the public Explanation: A secondary offering is when one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds of this sale are paid to the stockholders that sell their shares, rather than to the company. Textbook Reference: Please see textbook section 8.3.1

Interest rates are rising, causing the speed of prepayments to decline. To an MBS investor, this is an example of

Correct Answer: Extension risk Explanation: Extension risk is an issue when interest rates rise. Mortgages are being prepaid at a slowterer rate, causing the underlying mortgages to remain outstanding longer and consequently locking MBS investors into lower-yielding securities. Textbook Reference: Please see textbook section 3.3.1.2

All of the following securities pay interest that is taxable at the federal level and exempt from state taxation EXCEPT

Correct Answer: Federal Home Loan Mortgage corporation notes Explanation: Please note that this is an except question. Issues of the federal government like Treasury notes, bonds, bills and TIPS pay interest that is taxable at the federal level but exempt at the state level. Federal Farm Credit and Federal Home Loan Bank securities follow this same taxation rule. Government National Mortgage Securities, (Ginnie Maes), Federal National Mortgage Association securities (Fannie Maes) and Federal Home Loan Mortgage Corporation securities (Freddie Macs) are taxable at all levels. Textbook Reference: Please see textbook section 3.5

Of the interest rates listed below, which is considered the most volatile?

Correct Answer: Federal funds rate Explanation: The Federal Funds rate is the highly volatile rate at which member banks with excess reserves loan to other member banks for the purpose of meeting reserve requirements. It typically changes daily. Also, you should note that although the Fed has a target Fed Funds Rate, it does not actually set the rate. The Fed sets the Discount Rate. Textbook Reference: Please see textbook section 10.3.3.3

Analysis of the tax collections of a municipality are most relevant to:

Correct Answer: GO bonds. Explanation: The tax collections of municipal bonds are used to pay debt service on their general obligation bonds. U.S. Treasury bonds are backed by federal income taxes. Textbook Reference: Please see textbook section 3.4.1

A recommendation for a purchase of an interest in a non-traded public REIT would be most appropriate for an investor who

Correct Answer: Has a long-term time horizon and does not need liquidity Explanation: A non-traded REIT, although offered to the public, is not generally liquid. It is most suitable for someone who has a long-term investment time horizon because funds are usually tied up for a lengthy period. Textbook Reference: Please see textbook section 5.1.3

All of the following statements regarding the trading strategies of hedge funds are true EXCEPT

Correct Answer: Hedge funds are limited in the amount of leverage they can employ in accomplishing their investment objectives Explanation: The amount of leverage or other trading strategies employed are often left to the discretion of the hedge fund manager. Textbook Reference: Please see textbook section 5.3.2

During a period of recession, consumers generally experience I. Increasing bond prices II. Decreasing bond prices III. Lower bond yields IV. Higher bond yields

Correct Answer: I and III Explanation: In times of recession, interest rates are generally falling, so bond prices are rising. Textbook Reference: Please see textbook section 10.2.1

Which two of the following describe the process of assignment of exercise notice correctly? I. Exercise notices are assigned to one or more clearing members with short positions II. Exercise notices are assigned to one or more clearing members with long positions III. The OCC assigns exercise notice to clearing members on a FIFO basis IV. The OCC assigns exercise notice to clearing members based on its established procedures

Correct Answer: I and IV Explanation: Exercise notices are assigned against short options positions, which are then obligated to deliver. The OCC has written procedures which detail the process for assigning the exercise of options contracts. The clearing member firms then assign exercise notice to customers either randomly or on a first-in, first-out (FIFO) basis. Textbook Reference: Please see textbook section 6.6.1

Which of the risks listed below are most similar? I. Liquidity risk II. Systemic risk III.Reinvestment rate risk IV. Marketability risk

Correct Answer: I and IV Explanation: Liquidity and marketability risk are both associated with the ability to readily convert security to cash. Systemic risk affects the entire market and cannot be avoided through diversification. Changes in interest rates, wars, and recessions are sources of systemic risk. Reinvestment rate risk refers to cash being put back into the market at a lower return than what it previously earned. Textbook Reference: Please see textbook section 7.2.8

Which two of the following statements correctly state the tax treatment that applies to U.S. Treasury securities? I. Capital gains are fully taxable II. Capital gains are tax deductible III. Interest payments are generally tax-free at the federal level IV. Interest payments are taxable at the federal level but exempt at the state level

Correct Answer: I and IV Explanation: U.S. Treasury securities pay interest that is generally tax exempt at the state level, but is taxable at the federal level. Capital gains are fully taxable. Textbook Reference: Please see textbook section 3.5

Which of the following are types of underwritings? I. Firm commitment II. All or none III. Standby IV. Best efforts

Correct Answer: I, II, III and IV Explanation: 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. Textbook Reference: See textbook section 8.3.3

Which of the following investment opportunities offer a flow through of losses to investors? I. Closed end funds II. Direct participation programs III. Hedge funds IV. ETFs

Correct Answer: II and III Explanation: Both direct participation programs and hedge funds offer a flow through of losses that can be used to offset passive income. Limited partnerships are a common form of a direct participation program that provide this tax feature. Textbook Reference: Please see textbook section 5.3

Characteristics of blue-chip companies typically include I. Little or no regular dividend payment II. Steady history of dividend payments III. High growth potential IV. Moderate growth potential

Correct Answer: II and IV Explanation: Stocks of large, stable companies with a long history of stable earnings and dividends are known as Blue-chip stocks. Because of their size, blue chips offer low growth potential, but produce a steady income stream with relatively high dividend payments. Examples of blue-chip companies (as of 2011) include Coca-Cola, GE and IBM. Textbook Reference: Please see textbook section 1.2.1.1

Which of the following activities does not occur during the "pre-registration" period? A) IOIs are confirmed and shares allocated B) Prospectus is prepared C) Bake-off D) Due diligence is performed

Correct Answer: IOIs are confirmed and shares allocated Explanation: Indications of interest (IOI) are confirmed during the "post-effective" period, once the registration statement has been cleared by the SEC. Textbook Reference: Please see textbook section 8.1.1

All of the following generally accompany a slowing economy EXCEPT:

Correct Answer: Increased demand for credit Explanation: Demand for credit increases when the economy is strengthening, or in an expansionary cycle. The Fed puts more money into the money supply when it purchases securities. It does this to help increase the supply of money to reduce interest rates, and stimulate demand for credit. Inflation is usually stable or falling during periods of economic decline. Please see textbook section 10.1.3

Prepayment risk is of greatest concern when

Correct Answer: Interest rates fall Explanation: Prepayment risk is significant when interest rates decline, causing homeowners to prepay their mortgages and replace them with lower-cost loans. The result of this process is that investors receive their money back earlier than expected and are forced to reinvest at a lower rate. Textbook Reference: Please see textbook section 3.3.1.1

All of the following are characteristics of general partners in a limited partnership EXCEPT

Correct Answer: Limited liability Explanation: General partners have full financial liability for the partnership. They are the active managers, and can bind the partnership legally, borrow money on behalf of the partnership and determine the amount and timing of distributions. Textbook Reference: Please see textbook section 5.2.3

For a direct participation program, what is the consequence of being a tax pass-through entity?

Correct Answer: No tax at the partnership level Explanation: When organized as limited partnerships, DPPs are pass-through tax entities. They do not pay income tax at the entity or partnership level. All profits, losses and tax consequences are passed through to the partners. Textbook Reference: Please see textbook section 5.2

A retirement plan where contributions must be made on an after-tax basis is a

Correct Answer: Non-qualified plan Explanation: In a non-qualified retirement plan, participants contribute funds on an after-tax basis. The invested funds then grow on a tax-deferred basis until they are withdrawn by the employee. Textbook Reference: See textbook section 12.1.2

The document that most comprehensively discloses municipal bond and issuer information to potential investors is the

Correct Answer: Official statement Explanation: Like a prospectus for corporate securities, an official statement provides detailed information about the issuer's financial and operating condition and details of the bond offering. Textbook Reference: Please see textbook section 8.4.3

All of the following would be considered discretionary EXCEPT

Correct Answer: Order that specifies the size of the security but leaves the choice of price and time up to the account executive Explanation: 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. Textbook Reference: See textbook section 11.2.4

When evaluating the investment potential of a limited partnership, an investor should be most concerned with the

Correct Answer: Overall economic viability of the partnership Explanation: The most important factor in choosing a direct participation or limited partnership investment is its economic potential, not its tax benefits or loss pass throughs. Textbook Reference: Please see textbook section 5.2

Which of the following securities trades most like a straight debt security?

Correct Answer: Preferred stock Explanation: Because of its fixed dividend, preferred stock is subject to the same inverse relationship between price and interest rates as straight debt. Convertible bonds trade more like the underlying equity issue. Unit trusts do not trade; they are redeemed by the issuer. Textbook Reference: Please see textbook section 1.5.1.3

Which of the following is positively impacted when inflation is rising rapidly?

Correct Answer: Real estate values Explanation: The value of the real estate is likely to increase during a period of increasing inflation. Stocks may increase or decrease during a period of high inflation but are not tied to inflation as much as real estate. Prices of bonds and other fixed-rate investments fall when inflation is rising. Purchasing power is eroded in inflationary times, because today's dollar will buy fewer goods in the future. Textbook Reference: Please see textbook section 10.2.5.2

All of the following are true of both mutual funds and REITS EXCEPT

Correct Answer: Secondary market trading offers liquidity to investors Explanation: Mutual fund shares do not trade on the secondary market. They are redeemed by the fund. There are both publicly traded, and private, but non-traded REITS. Textbook Reference: Please see textbook section 5.1.3

If the Fed determines that the current economic growth rate is too strong it is most likely to do which of the following?

Correct Answer: Sell U.S. Treasury securities Explanation: If the economy is growing too quickly the Fed will tighten the money supply by selling securities. Decreasing the discount rate or margin requirements will ease the money supply. The Fed funds rate is not established by the Fed; it is the market rate determined by banks lending funds to each other overnight to meet reserve requirements. Textbook Reference: Please see textbook section 10.3.3

Rising commodity prices in the U.S. would most likely cause which of the following responses from the Federal Reserve?

Correct Answer: Sell securities in the open market Explanation: Rising commodity prices tends to be a sign of inflation. To control potential inflation the Federal Reserve would tighten the money supply. This could be accomplished by selling securities. Purchasing securities in the open market or decreasing interest rates would have the opposite effect. Textbook Reference: Please see textbook section 10.3.3.2

What term do economists use to describe a downturn in the economy that is characterized by both rising unemployment and rising prices?

Correct Answer: Stagflation Explanation: Stagflation is characterized by rising unemployment and increasing prices. Textbook Reference: See textbook section 10.1.3

All of the following types of U.S. Treasuries pay interest through periodic coupons except

Correct Answer: T-bills Explanation: T-bills pay interest that is the difference between the purchase price and the par value at maturity i.e., as a discount to maturity value. They do not pay periodic coupon interest. Textbook Reference: Please see textbook section 3.2.1.1

Which of the following is not often cited as an advantage to investing in mutual funds?

Correct Answer: Tax benefits Explanation: Mutual funds do not offer any special tax benefits, unless the fund itself is investing in tax advantaged instruments, such as municipal bonds. Textbook Reference: Please see textbook section 4.2

Which of the following is not a "tool" of the FRB in monetary policy?

Correct Answer: Taxing and spending Explanation: Taxing and spending is a component of fiscal policy, not monetary policy. Textbook Reference: Please see textbook section 10.3.2

Options contracts are in the same class when

Correct Answer: The issuer and type are the same Explanation: Option contracts of the same type for the same issuer are in the same class. Textbook Reference: Please see textbook section 6.1.1

Which of the following statements about the purchase of a put is TRUE?

Correct Answer: The more out-of-the-money the put purchased, the more bearish the strategy Explanation: A long put permits the holder to sell stock at the exercise price. The more out of the money the put is (the lower the strike price), the more the underlying stock price will have to decline before the put has value. Textbook Reference: Please see textbook section 6.3.1

Which of the following statements is correct regarding US government agency securities?

Correct Answer: The securities of GNMA are backed by the US government, while those of FNMA and other government sponsored enterprises are not backed by the US govt, although these carry an implied backing. Explanation: US government agency securities (GNMA) are backed by the US govt, while the securities of government sponsored enterprises (FNMA) are not backed by the US govt. These securities, do, however, carry the implicit backing of the US govt. Textbook Reference: Please see textbook section 3.3.1

A customer writes a put option. The customer's maximum loss is

Correct Answer: The strike price minus the premium down to zero Explanation: The maximum loss for an investor who writes a put option is the strike price premium received. If the value of the underlying stock goes down to 0, the writer will be forced to buy the stock at the strike price, sell it for zero, and only earn the premium to recover part of the losses. Textbook Reference: See textbook section 6.3.2

In which of the following areas are open-end funds and exchange-traded funds similar?

Correct Answer: They both make capital gains distributions to investors Explanation: Both open-end funds and exchange-traded funds make capital gains distributions to investors. Textbook Reference: Please see textbook section 4.6

All of the following statements about structured products are true EXCEPT

Correct Answer: They offer a high degree of liquidity Explanation: Structured products typically do not trade after they are issued. There is generally a significant discount when they are sold before their maturity. Textbook Reference: Please see textbook section 5.5

The entity that controls the money supply acts as the U.S banking regulator and serves as a banker to the government is the

Correct Answer: U.S. Central bank Explanation: The U.S. Central Bank or Federal Reserve is the banker to the U.S. government and is responsible for the monetary policy of the country. It also regulates other banks in the national banking system. Textbook Reference: Please see textbook section 10.3.3

Which of the following economic indicators is considered a lagging indicator?

Correct Answer: Unemployment rate Explanation: The unemployment rate is considered a lagging indicator because it tends to react several quarters after changes in the economy. Stock market returns are considered a leading indicator; while GDP and retail sales are considered coincident indicators. Textbook Reference: Please see textbook section 10.1.4.2

All of the following features apply to an investment in a UIT EXCEPT

Correct Answer: Units trade in the secondary market Explanation: Units of a UIT must be sold to the issuing trust; they do not trade in the secondary market. Textbook Reference: Please see textbook section 4.4.2.1

All of the following are advantages of structured product investments EXCEPT

Correct Answer: Unlimited upside potential Explanation: Structured products offer a limit on downside risk. The tradeoff for this protection is a limit on the upside potential. Textbook Reference: Please see textbook section 5.5

An investor wishes to purchase fixed return security that offers long-term stability with no reinvestment risk. Which of the following securities is most suitable?

Correct Answer: Zero-coupon municipal bonds Explanation: Zero-coupon bonds are purchased at a discount and do not pay periodic interest payments; instead, the interest is paid at maturity. There is no reinvestment risk because the investor does not need to find alternatives for investing regular interest payments despite changes in rates which could be unfavorable. Textbook Reference: Please see textbook section 7.2.2

All of the following would result in a statutory disqualification except

Correct Answer: a conviction for a securities related felony 11 years ago Explanation: 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. Textbook Reference: See textbook section 13.3.7

When describing the features of a closed-end fund to a client you would not say that they

Correct Answer: are redeemed by the issuer at the close of the business day Explanation: Closed-end investment companies are not redeemable securities. They are trading in the secondary market amongst investors. The other statements are correct. Textbook Reference: See textbook section 4.3.2.1

The status of a company's financial position at a particular point in time is best measured by which of the following financial statements?

Correct Answer: balance sheet Explanation: The balance sheet displays a company's financial position at a point in time. It lists the assets, liabilities, and shareholders' equity balances as of the fiscal quarter or year end. The income statement provides the best overview of a company's profitability during a particular period. It provides an overview of the company's sales amounts, associated expenses, and net income. The cash flow statement records the cash inflows and outflows of the company during a particular time period. Textbook Reference: Please see textbook section 10.2.6.2

When a broker-dealer maintains a firm market in a stock, that broker-dealer is committed to

Correct Answer: buying or selling the normal trading unit of that stock at the quoted price Explanation: When a broker-dealer maintains a firm market in a stock it is committed to trading the stock at the quoted price, and for up to the quoted number of round lots. Any amount greater than that must be negotiated with the broker-dealer. Quotes in the NASDAQ are firm quotes, whereas quotes on the pink sheets are workable indications, and are not binding. Textbook Reference: See textbook section 9.3.3.1

The rate of interest paid by banks to other banks for overnight loans is called the

Correct Answer: federal funds rate Explanation: The Fed Funds rate is calculated on a daily basis and represents the rate that banks charge other banks for overnight loans. Textbook Reference: See textbook section 10.3.3.3

As compared to U.S. Treasury securities, U.S. Agency securities

Correct Answer: have slightly higher yields Explanation: Both U.S. Treasury and U.S. Agency securities are actively traded in the secondary marketplace. U.S. Agency securities often pay interest monthly, while U.S. Treasury Notes and Bonds pay interest every six months. Some agency issues are exempt from taxation at the state and local levels, but mortgage-backed certificates issued by Fannie Mae, Freddie Mac and Ginnie Mae are subject to taxation at all levels. Agency securities yield slightly more than U.S. government securities because they do not share the explicit backing of the U.S. government (other than Ginnie Mae). They are considered second in safety of principal to U.S. Treasury Securities. Textbook Reference: Please see textbook section 3.3

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

Correct Answer: he will have to pay taxes on all funds received in excess of his original contribution Explanation: 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). Textbook Reference: See textbook section 12.3.3.5

Losses from direct participation programs can be used to offset

Correct Answer: income from limited partnerships Explanation: Losses from DPP's can be used to offset passive gains, such as income from limited partnerships. Textbook Reference: See textbook section 5.2

A "not-held" order means

Correct Answer: that the commission house broker will not be held responsible if he does not get an immediate execution of the market order Explanation: A "market, not-held" order means that the customer is letting the RR use her own best judgment as to the price and time at which the transaction will be executed, and will not hold the RR responsible if she misses the market for a security. Textbook Reference: See textbook section 11.2.4

An investor concerned about rising prices would most likely invest in a

Correct Answer: variable annuity, as its equity exposure, provides a hedge against inflation. Explanation: Investments in equities generally serve as a hedge against inflation. Fixed income investments, such as fixed annuities will lose purchasing power as prices increase. The tax consequence of an investment is not relevant when considering how to hedge against rising prices. Textbook Reference: See textbook section 12.3.3 Times Answered:

Under SIPC, each customer's account is insured for A) $500,000 on bonds B) $500,000, with cash not to exceed $250,000 C) $600,000 in bonds and cash D) $250,000 in cash

Covers up to $500,000 in cash and securities but no more than $250,000 in cash

the account documents and disclosures that customers receive.

Customer Trade Confirmation -Firms must send a written trade confirmation by settlement 1. Trade date 2. Settlement date 3. name of security & CUSIP ID 4. The amount of securities 5. Trans price 6. Time of trade 7. Execution market 8. Broker-dealer capacity (agent or principal) 9. Fees Statements - sent quarterly monthly - penny stocks and options Holding customer mail -acct statements, trade conf, disclosure - on written request -up to 3 months -must notify client of alternate account online to view or call Regulation S-P: Information Security -establishes the privacy standards to ensure the security and confidentiality of customer data -get at account opening and every year thereafter -30 days minimum

What amount of money may a public official receive from the associated persons of a municipal broker-dealer without triggering the prohibitions of Rule G-37? A) $500 B) $1,000 C) $300 D) $250

D $250

You purchase ten 8% T notes at 101-16. What is the dollar amount of this purchase? A) $10,812.00 B) $1,001.50 C) $1,011.60 D) $10,150.00

D) $10,150.Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 16/32=.5 101 + .5= 101.5 = $1015*1000= $1,015 × 10 bonds = $10,150

All of the following activities have a positive effect on the U.S. balance of payments EXCEPT A) An increase in foreign investments in the U.S B) An increase in U.S. exports to foreign countries C) New U.S. investment in foreign countries D) Foreign purchases of U.S. securities

D) Foreign purchases of U.S. securities

A joint account may be opened by all of the following EXCEPT A) three sisters B) a parent and minor child C) two spouses D) two unrelated coworkers

D) Parent and a minor. Any two or more persons can have a joint account, but a minor is specifically excluded from the definition of a person.

The underwriting spread is defined as the difference between the A) total takedown and the underwriting proceeds B) Manager's fee and the selling concession C) Underwriting fee and the manager's fee D) POP and the underwriting proceeds

D The difference between the public offering price of a new issue and the proceeds received by the issuer

AcquisitionCo launches a tender offer to purchase 10 million TargetCo shares at $25 per share, subject to a minimum tender of 5 million shares. If only 2.5 million shares are tendered the tender will: A. proceed for 2.5m shares B. proceed for 5 m shares C. Proceed for 10m shares D Be cancelled and no shares tendered

D be cancelled and no shares tendered

All of the following statements concerning convertible callable preferred stock are true EXCEPT A)if called, the owners have the option of retaining the preferred and will continue to receive dividends B)upon conversion, earnings per common share will be diluted C)the dividend rate is less than a nonconvertible preferred stock D)after the call date, dividends will cease

D) After the call date of convertible preferred, dividends will no longer be issued, and stockholders will not have the option of continuing to receive dividends. When preferred stock is converted to common stock there are more outstanding shares available, thus decreasing earnings per share. Additionally, in return for the right to convert to common, convertible preferred holders receive a lower coupon.

A broker-dealer provides a communication to 15 retail customers and 10 institutional investors. This communication would be classified as A) retail communication B) market commentary C) institutional communication D) correspondence

D)Correspondence to 25 or fewer retail investors within any 30-calendar-day period

A) short tendering stock. B) publishing favorable research on a company's bonds just prior to the effective date of an equity follow-on offering. C) overselling an IPO and subsequently repurchasing the shares in the secondary market, at a profit. D) stabilizing an IPO at a price at or below the public offering price.

D)short tendering stock During a tender offer, an investor can tender only up to the amount of their net long position. An investor could not tender more than their net long position. Stabilizing, overselling a new issue and publishing research on unrelated products are all permitted activities.

The statement "I believe that government intervention is necessary in order for an economy to grow and reach a point of stability" was most likely made by:A) the head of fixed-income trading at an investment bankB) the president of the NY Federal Reserve bankC) an advocate of supply-side economicsD) an adherent of Keynesian economic theory

D. An adherent of Keynesian economic theory Keynesian economic theory espouses that the government needs to be the leading force in promoting economic growth and stability. Supply-side economics advocates that tax cuts provide incentives for consumers to save and invest, thereby producing benefits that will encompass the broad economy

Monetary policy is set by: A. Supreme Court decisions B. Congressional action C. Presidential edict D. Federal Reserve action

D. Federal Reserve Action (Monetary policy is set by the Federal Reserve Board. The Federal Reserve can either tighten; or loosen; credit by using any of its 4 tools, which can be memorized as "DORM." D is Discount rate; O is Open Market Operations; R is Reserve Requirements; and M is Margin on securities.)

Fees and Commissions 1. When can a broker dealer charge a customer both a commission and a mark-up or mark-down in a single trade? A. For hard-to-locate securities B. If the total fees remain under 5% C. For Foreign securities D. Firms cannot charge both

D. Firms cannot charge both Charging both is a hidden profit violation

Which of the following is another name for the preliminary prospectus that is distributed to prospective investors before the effective date of a securities offering? A) Blue sky memorandum B) Red herring C) Tombstone D) Greenshoe

D. Red Herring

Which of the following securities does not trade on the OTCBB? A) Warrants B) Foreign equity issues C) DPPs D) Debentures

Debentures OTCBB securities include national, regional, and foreign equity issues, warrants, units, American Depositary Receipts (ADRs), and Direct Participation Programs (DPPs). Debentures are debt securities; only equity securities are included in the OTCBB.

In a deflationary environment, which of the following statements is most likely to be true. A. Interest rates will increase B. Outstanding bonds will have higher coupons than new bonds C. Bond prices will decrease D. The Consumer Price Index will increase

Deflation. The cost of goods and services is going down. And what's most likely true is that outstanding bonds will have higher coupons than new bonds. And why are we thinking that? Well, in a deflationary environment, one of the things that the Federal Reserve might do is lower interest rates. And therefore those new bonds are gonna come out with lower coupons. As a result, the outstanding bonds will have higher coupons be priced at a premium because they're paying above market rates.

What investment attributes are offered by virtually all mutual funds?A)Low risk B)Diversified, professionally managed portfolios C)Very low cost of ownership D)Tax-exempt earnings

Diversified, professionally managed portfolios Mutual funds enable investment management firms to pool funds contributed by many investors to create and manage a diversified portfolio of securities. Some mutual funds track indexes and are passively managed, while others are actively managed. Tax benefits, risk levels and costs of ownership vary widely among different mutual funds.

Personal incomes are an example of an economic indicator that is A) Acyclic B) Countercyclic C) Procyclic D) Defensive

Economic Indicators can have one of three different relationships to the economy: Pro-Cyclic: A pro-cyclic (or pro-cyclical) economic indicator is one that moves in the same direction as the economy. So if the economy is doing well, this number is usually increasing, whereas if we're in a recession this indicator is decreasing. The Gross Domestic Product (GDP) is an example of a pro-cyclic economic indicator. Counter-Cyclic: A counter-cyclic (or counter-cyclical) economic indicator is one that moves in the opposite direction as the economy. The unemployment rate gets larger as the economy gets worse so it is a counter-cyclic economic indicator. Acyclic: An acyclic economic indicator is one that has no relation to the health of the economy and is generally of little use. The number of home runs the New York Yankees hit in a year generally has no relationship to the health of the economy, so we could say it is an acyclic economic indicator.

a rights offering

Existing shareholders are given the right to buy new shares at a discount to the current market price; Dilutes ownership unless option is exercised; Sometimes the option can be sold

To loosen credit, the Federal Reserve Board might take all of the following actions EXCEPT A) reducing taxes B) buying securities in the open market C) reducing reserve requirements D) reducing margin requirements

Federal Reserve Action (Monetary policy is set by the Federal Reserve Board. The Federal Reserve can either tighten; or loosen; credit by using any of its 4 tools, which can be memorized as "DORM." D is Discount rate; O is Open Market Operations; R is Reserve Requirements; and M is Margin on securities.)

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

An investor wants to sell 1,000 shares of stock immediately at the best price available in the market. What type of order should she enter? A) Market B) Stop market C) Trailing stop D) Limit

It is an order to buy or sell immediately at the current price. ... into a market order, and the shares would be sold at the best available price.

All of the following statements are true about convertible bonds EXCEPT A) the conversion ratio specifies the number of shares the bond holder will receive per bond exchanged. B) convertible bonds help issuers achieve lower fixed costs for borrowing. C) a bond cannot be both callable and convertible. D) the bond indenture explains the terms under which conversion can occur.

For convertible bonds, the parity price concept is used to determine when it is financially beneficial to convert a bond into shares of common stock. If two assets are trading at parity, it can be inferred they are at the same price or value. the conversion ratio states the price at which the stock is convertible

Kevin is a registered representative, who is moving from his firm's New York to San Francisco office. In order to update FINRA of this change, his

Form U4 must be updated within 30 days of the change

Market Protection A trader learns that an institutional client intends to buy 17,100 shares of XYZ in a block trade later that day. Can the trader do the following? 1. Enter a buy order in his personal account that represents less than 10% of the block trade 2. Call other clients and suggest they buy XYZ stock provided he does not disclose the block trade 3. Call other clients and suggest they sell put options 4. Enter a client order to buy XYZ stock that was received on an unsolicited basis

Front running violations 1. No 2. No 3. No 4. Yes

An infrastructure project that is free to the public is most likely backed by which of the following? A) A double barreled bond B) Special assessment bond C) A general obligation bond D) An industrial revenue bond

General obligation bonds are issued to raise funds right away to cover costs, while revenue bonds are issued to finance infrastructure projects.

All of the following statements describe fiscal policy EXCEPT: A) An expansionary stance of fiscal policy involves a net increase in government spending B) It was introduced in the 1930s by John Maynard Keynes to combat the Great Depression C) It attempts to stabilize the economy by controlling interest rates and the supply of money D) A contractionary fiscal policy occurs when net government spending is reduced either through higher taxation revenue, reduced government spending, or a combination of the two

Government policy that attempts to manage the economy by controlling taxing and spending.

Broker Dealers

Have an inherent conflict of interest because they should seek the best prices for their clients but their goal is to profit through the transaction; Traders typically place limits on how their orders are filled when working through a broker dealer -Broker dealers can execute transactions as a 1 broker or 2 deaer Broker (Agent) Fee: Commission + Commission Role: Match two parties Dealer (Principal) Fee: mark-down (BD is buying) Fee: mark-up (BD is selling) Trade for its own account

Inside Market 1. What is the inside market 2. At what price would a market order to buy be filled? 3. At what price would a market order to sell be filled?

Highest bid or lowest asked quotes between dealers trading for their own inventories. Distinguished from the retail market, where quotes reflect the prices that customers pay to dealers. 1. What is the inside market 89.90 x 89.95 (1 x 2) 2. At what price would a market order to buy be filled? $89.95 3. At what price would a market order to sell be filled? $89.9

Two years ago, Peter's income was $325,000 and last year his income was $275,000. This year he is on target to match last year's income level. Peter would be considered a (n) A) Sophisticated investor B) Institutional investor C) Qualified investor D) Accredited investor

How do you prove you are a sophisticated investor? To be considered a sophisticated investor your accountant needs to certify that you: have earned an income of $250,000 or more per annum for the last two years or. hold net assets of at least $2.5 million.

Which two of the following describe the process of assignment of exercise notice correctly?I. Exercise notices are assigned to one or more clearing members with short positions II. Exercise notices are assigned to one or more clearing members with long positions III. The OCC assigns exercise notice to clearing members on a FIFO basisIV. The OCC assigns exercise notice to clearing members based on its established procedures

I and IV Exercise notices are assigned against short options positions, which are then obligated to deliver. The OCC has written procedures which detail the process for assigning the exercise of options contracts. The clearing member firms then assign exercise notice to customers either randomly or on a first-in, first-out (FIFO) basis.

A client purchases, $3,000 of stock in her account. What's the initial margin requirement.

I$2,000 is how much you have to post by what rule, whose rule said you gotta go up to 2K, FINRA's rule. Remember a hundred percent up, you gotta post up to $2,000. 1500 would have been the Reg T requirement but FINRA has swooped in and said if our requirement results in a higher initial margin threshold, you'll have to meet our higher FINRA requirement, which is 100% up to $2,000?

Which of the following securities may be traded on a stock exchange? I. Common stock II. Derivatives III. Mutual Funds IV. Bonds A)I, II and III only B)I, II and IV only C)I only D)I and IV only

I, II and IV only The securities traded on a stock exchange include: common and preferred shares issued by companies, unit trusts, derivatives, pooled investment products (including REITS and closed end shares), and bonds. Mutual funds shares are issued and redeemed only by a mutual fund or one of its sponsors.

Bonds with long maturity offer I. stability of income II. stability of market value III. fluctuation of income IV. fluctuation of market value

I. Stability of Income and IV. Fluctuation of market value Why? Bonds with long maturities offer stability of income due to the constant, semi-annual interest payments made to the bondholder. They also I. Stability of Income and IV. Fluctuation of market valueWhy?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.with a change in underlying interest rates than comparable short-term debt.

Exemption from reg under Act of '33

If do not want to register with SEC Exempt Securities 1. US govt securities 2. US govt agency securities 3. Muni bonds 4. Securities issued by nonprofits 5. Commercial bank securities 6. Commercial paper (no longer 270 days) Exempt Transaction 1. Reg D 2. Rule 144 3. Rule 144A 4. Rule 147 5. Reg A - small businesss 6. Reg S - overseas

The 5% policy applies to transactions A) In listed securities only B) In both listed and unlisted securities C) In securities where a bona fide market is not deemed to exist D) Executed on a principal basis but not on an agency basis

In securities transactions, whether in "listed" or "unlisted" securities, if a member buys for his own account from his customer, or sells for his own ...

All of the following generally accompany a slowing economy EXCEPT A)An increase in the money supply B) Increased demand for credit C) An increase in purchases of securities by the Fed's Open Markets Committee D) Stabilizing or falling inflation

Increased demand for credit Demand for credit increases when the economy is strengthening, or in an expansionary cycle. The Fed puts more money into the money supply when it purchases securities. It does this to help increase the supply of money to reduce interest rates, and stimulate demand for credit. Inflation is usually stable or falling during periods of economic decline.

Customer Account Title

Individual Account-single ownership total account authority 100% death - refer to will Joint Tenants in Common (JTIC) -divided ownership - assets pass to named beneficiary Joint Tenants with rights of Survivorship (JTWROS) -assets remain in the account and avoid probate Minor account- minor is owner minor cannot place trades only one custodian to manage risk -custodian cannot be same individual that donates the assets to the account -minor resp for any taxes -minors ss listed on acct -gifts irrevocable Trust account - legal entity to benefit another person -settlor (ie maker grantor) - can restrict use of assets -trustee - holds legal title to property in trust -beneficiaries - property is held in trust for them multiple beneficiaries allowed

During a time when the yield curve is inverted, the Federal Reserve is likely to I. Increase interest rates II. Decrease interest rates III. Buy securities in the open market IV. Sell securities in the open market A) II and III B) I and III C) II and IV D) I and IV

Inverted yield curve: -short term treasuries are actually paying a higher yield than the long-term treasuries. How does the Federal Reserve affect the yield curve? An increase in fed funds (short-term) tends to flatten the curve because the yield curve reflects nominal interest rates: higher nominal = higher real interest rate + lower inflation. Decrease interest rates and Reserve increases the federal funds rate, it typically increases interest rates throughout the economy. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products. sell securities

structured product investment

Investment banks advertise structured notes as the ideal vehicle to help you benefit from excellent stock market performance while simultaneously protecting you from bad market performance.

A public offering of company stock that takes place after an IPO is called A) a rights offering B) a greenshoe C) a supplementary offering D) a follow-on offering

Key Takeaways. A secondary offering occurs when an investor sells their shares to the public on the secondary market after an IPO. Secondary offerings are often also called as follow-on offerings.

Underwriting Syndicate Firm Commitment

Lead Manager -Manages deal and runs process -Directs/leads entire underwriting process -Due diligence on issuer -Runs road show & marketing efforts -Distributing & allocates shares Syndicate Members -Financially committed to underwrite shares (will buy/own unsold shares) Selling Group -Helps sell shares 9as agent) No financial commitment to deal

New orders for durable goods is what kind of economic indicator? A) Coterminous B) Lagging C) Leading D) Coincident

Leading.

Equity Marketplaces 1. On national exchanges MM quotes much be: 1-sided / 2-sided

Listed Exchanges -New York Stock Exchange (NYSE) -Physical floor -designated market maker (DMM) -Auction marketplace Nasdaq -Electronic exchange -Many market makers per stock -negotiated marketplace 1. 2-sided

The largest expense of a mutual fund is typically the

Management (investment advisory) fees are normally the largest expense incurred by an open-end investment company (mutual fund).

Initial & Maintenance Margin

Margin account -federal reserves regulation T requires that even in a margin account, the customer deposit 50% of the purchase price. -Reg T is 50%. Maintenance -long: account has to stay at either 25% of current mv -short: 30% Margin maint call -if account falls below required threshold recalculated daily Reg T - above 4k finra - below 4k Marginable Securities -Anything traded on an exchange on the NYC or on NASDAQ, OTC issues approved by the Fed. -Closed-end funds, ETFs, LEAPS which are long-term options contracts and fixed income securities like treasuries can all be purchased with margin. Non-marginable securities -OTC issues NOT approved by Fed -std. options < 9 mos annuity contracts -new issues, (IPOS, follow ons) -Mutual funds

Which of the following statements regarding mutual funds is not correct? A) They are redeemed at the public offer price (POP). B) Investors can choose among many different investment styles within the universe of mutual funds. C) They are inappropriate for investors seeking investments that trade intra-day D) They cannot be purchased on margin

Mutual funds are off-limits for intraday trading. ... So, mutual funds do not offer intraday pricing, as their assets fluctuate in market value and their managers make buy and sell decisions all day. a.k.a., "POP,' the price an investor pays for a mutual fund or an initial public offering. For a mutual fund= NAV + the sales charge.

A comparison of a mutual fund and a hedge fund will show that A) Mutual funds may invest in various types of securities, including both debt and equities, while hedge funds can invest in a broad array of securities, as well as other alternative products, such as real estate and commodities. B) Both mutual funds and hedge funds can trade on margin in their respective portfolios, and both can use leverage and derivatives to finance their activities. C) Mutual funds tend to be illiquid investments, while hedge funds are often very liquid. D) Hedge funds are typically suitable for a broad range of investors, while mutual funds are only appropriate for more sophisticated investors

Mutual funds are regulated investment products offered to the public and available for daily trading. Hedge funds are private investments that are only available to accredited investors. Hedge funds are known for using higher risk investing strategies with the goal of achieving higher returns for their investors. mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is overseen by a professional money .

All of the following statements about municipal revenue bonds are TRUE EXCEPT:

My Answer: They are not subject to debt limitations established by the issuer. Correct Answer: The maturity of the revenue bond usually coincides with the useful life of the facility being built. Explanation: Municipal revenue bonds are issued to support long-term infrastructure projects. Bonds that are issued to build them usually mature before the facility is no longer of use. Municipal revenue bonds do not have debt limitations like general obligation bonds. Revenue bonds can be issued by states, political subdivisions (such as counties or townships), interstate authorities and intrastate authorities. The interest and principal owed to bondholders is paid from the revenue received from the facility. Textbook Reference: Please see textbook section 3.4.2

An investor who lives in the state of Minnesota purchases municipal bonds that are issued in the state of Wisconsin. The interest on the bonds

My Answer: Will fluctuate based on the market value of the bonds. Correct Answer: Will probably be more than the investor would have received from an investment in US government bonds. Explanation: Interest on municipal bonds is generally higher than US Government bonds because munis are considered less safe than government bonds. The interest payments on municipal bonds do not fluctuate; they are fixed at issue. If the interest on an outstanding bond is more than the coupon for similar new issues, the outstanding bond will trade at a premium; if less, the bond will trade at a discount. The interest on municipal bonds may be exempt if the bondholder lives in the state of issue only. Textbook Reference: Please see textbook section 3.4.5.2

Which of the following types of payment can a member firm accept from an issuer for its market making activities? A) Cash B) None C) Securities D) Non-cash

None

non-qualified variable annuity

Nonqualified variable annuities are tax-deferred investment vehicles with a unique tax structure. While you won't receive a tax deduction for the money you contribute, your account grows without incurring taxes until you take money out, either through withdrawals or as a regular income in retirement.

Prior to accepting a part-time job at a day-care center, RR Anna must A) Notify her Firm B) Notify Day-Care C) Receive Permission from her Firm D) Notify FINRA

Notify her firm-a Registered rep (RR) must provide advance written notification to her employer prior to accepting a part-time position outside her firm

Adjustment of Orders:

On the morning of the ex-dividend date any orders that are entered at or below the market are adjusted downwards by the amount of the dividend. This includes buy limit, sell stop, and sell stop limit orders. Note that orders entered at or above the market, including sell limit, buy stop, and buy stop limit orders, are not adjusted.

The shares of which of the following investment companies are NOT redeemed by the issuing companies? I. UITs II. Open end companies III. Closed-end companies IV. ETFs

On the other hand, a closed-end investment company issues a fixed number of shares and does not redeem its own shares. UIT's allow redemption Open-end investment companies must be prepared to redeem shares at net asset value

Which of the following orders wil be automatically reduced on the morning of the ex-divided date? A. Market order B. Buy limit order C. Sell limit order D. Buy stop order

Only BLISS orders are reduced: -Buy Limit -Sell Stop

greenshoe

Option for underwriters to issue up to 15% more shares to prevent them from having a short if shares are over-subscribed

Conversion Ratio for convertible bonds

Par Value of Bond / Conversion Price $1,000 / $36.37 = 27.50 shares. Conversion value. = equity value or stock value of the convertible. = stock price x conversion ratio

The Economic Cycle Which type of equities might an investor consider in each phase of the economic cycle? A recession occurs after how many consecturive quarters of negative GDP growth?

Phases -Expansion-> Peak: Cyclical stocks, Auto, Tech, discretionary companies where people spend their money when they have extra cash. -Recession-> Trough: Defensive stocks, Utilities, consumer items, healthcare, stuff that people need to buy regardless of the economic cycle could be better. How many consecutive quarters of negative GDP growth must we see to formally defined as a recession? Two consecutive quarters of negative GDP growth would technically cause us to be in a recession.

AML compliance program

Policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and its rules. ◆ Policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions ◆ Ongoing AML employee training, which generally requires annual training for persons designated by the firm Requires a compliance officer, the designated person must be an associated person of the broker-dealer. Does not have to be registered or be a senior manager.

Cumulative preferred stock

Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid.

Participating preferred stock

Preferred stock that shares with common stockholders any dividends paid in excess of the percent stated on preferred stock.

Callable preferred stock

Preferred stock that the issuing corporation, at its option, may retire by paying the call price plus any dividends in arrears.

Rule G-37

Prohibits municipal securities firms from engaging in municipal securities business with an issuer for two years after any political contribution is made to an official of that issuer. In this context, municipal securities business refers to negotiated underwriting, not to competitive underwritings. The idea, is to limit large political contributions in return for being selected as underwriter for that issue. Contributions of up to $250 per election are permitted by municipal finance professionals as long as these individuals are eligible to vote for the issuer official.

OTCBB (Over the Counter Bulletin Board)

Regulated "over-the-counter" quotation service for securities that do not trade on national markets, including ADRs and Direct Participation Programs (DPPs). Participants must remain current with SEC filings and must have a market maker

To participate in a private placement under Regulation D as an "accredited investor," a married couple must have total assets above $1 million or combined annual income above A) $300,000 in each of the two most recent years B) $200,000 in each of the two most recent years C) $250,000 in each of the two most recent years D) $500,000 in each of the two most recent years

Regulation D is a private offering of securities, which can include an unlimited number of accredited investors and generally a maximum of 35 non-accredited investors. An accredited investor can take different forms; an individual with a net worth, excluding the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past two years exceeded $200,000 ($300,000 joint with spouse) with a reasonable ...

ABC Corporation is looking to raise capital overseas and avoid SEC registration. The exempt transaction they should use is:

Regulation S related to overseas offerings

In which of the following events will an open order price not be adjusted? Dividend payable in both cash and securities B) Reverse split C) Forward stock split D) Stock dividend

Reverse split. Open orders must be cancelled (not adjusted) at or before the close of business on the day before the ex-date for reverse splits.

SEC Rule 144 provides exemption from registration for A) securities issued by banks B) restricted stock C) municipal bonds D) preferred stock

Rule 144 is the most common exemption that allows the resale of unregistered securities in the public stock market, which is otherwise illegal in the U.S..

Which of the following events is not covered by SEC Rule 145? A) The declaration of a cash or stock dividend B) Reclassifications of ownership structure C) Transfers of assets D) Mergers & acquisitions

Rule 145 is an SEC rule that allows companies to sell certain securities without first having to register the securities with the SEC. This specifically refers to stocks that an investor has received because of a merger, acquisition, or reclassification. addresses reclassifications, mergers or consolidations, and transfers of company assets

A customer writes a put option. The customer's maximum loss is A) Infinite B) The strike price minus the premium down to zero C) The strike price plus the premium D) The premium received

The maximum gain for a put writer is the premium received. The maximum loss is the exercise price minus the premium received.

In general, the exemptions provided by Rule 147 and Regulation D accomplish which of the following? A) Enable issuers to sell securities to the public at less of an expense if certain conditions are met. B) Permit issuers who sell securities to accredited investors only an exemption from registration with the SEC C) Enable small issuers to raise money through securities sales with reduced expense D) Provide guidance to non-domestic issuers on selling securities to U.S. citizens

Rule 147 - SEC rule that provides an exemption from the registration statement and prospectus requirements of the 1933 Act for securities offered and sold exclusively intrastate. Regulation D An unregistered offering of securities made primarily to accredited investors Correct Answer: Enable issuers to sell securities to the public at less of an expense, if certain conditions are met. Explanation: As a general statement, Rule 147 and Reg D allow the sale of securities to the public without registration with the SEC. Textbook Reference: Please see textbook section 8.2

Which of the following is not a characteristic of the accumulation period of a variable annuity? A) Death benefits are available B) Investor makes payments to the insurance company C) Investor must pay income tax on investment growth D) Investor purchases accumulation units in subaccounts

TAn accumulation period (or accumulation phase) is the segment of time in which contributions to an investment are made regularly, or premiums are paid on an insurance product, such as an annuity, intended to be used for retirement purposes. Most variable annuity (VA) contracts include an insurance component that provides a death benefit. A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic pay- ments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. Tax deferral is a second key benefit to owning a variable annuity. Like every annuity, you pay no tax on any growth in your account value until you make a withdrawal. The value of variable annuities is represented by accumulation units. The value of each unit rises and falls with the investment it represents. The account value of a variable annuity rises and falls based on the value of the units, not because there are more or less units.

Which of the following items is not associated with monetary policy? A) Discount rate B) Reserve Requirements C) Open market operations D) Tax increases

The Fed has traditionally used three tools to conduct monetary policy: reserve requirements, the discount rate, and open market operations. In 2008, the Fed added paying interest on reserve balances held at Reserve Banks to its monetary policy toolkit.

Carol is a registered representative who has become CE Inactive. This likely means that she has failed to complete her A) Regulatory Element CE within 120 days of her second anniversary of being registered B) Firm Element CE within 120 days of her 2nd anniversary of being registered C) Regulatory Element CE annually D)Firm Element CE annually A) Regulatory Element CE within 120 days of her second anniversary of being registered B) Firm Element CE within 120 days of her 2nd anniversary of being registered C) Regulatory Element CE annually D) Firm Element CE annually

The Regulatory Element requires all registered individuals to complete a computer-based training session within 120 days of the second anniversary of their

Prior to an Initial Public Offering, a company enters a period when it is prohibited from releasing new material information to the public without amending its registration and prospectus. This time frame is known as A) the blackout period. B) the quiet period. C) the cone of silence. D) the restricted period.

The SEC mandates a cooling-off to keep companies from building hype surrounding public offerings of securities, beyond information they disclose in public filings. Violating quiet-period requirements can result in disciplinary action, and it also can cause delays in the offering.

Interest charges in a margin account are based on the A) Broker call rate B) Federal funds rate C) Discount rate D) Prime lending rate

The broker call loan rate is the interest rate banks charge broker-dealers on the money they borrow to relend to margin account customers.

An employee of another broker-dealer would like to open an account with your firm. All of the following statements regarding the employee and the account are true EXCEPT that the A) employer must be notified of the opening of the account B) broker-dealer holding the account must approve each transaction made by the person before entry of the order C) employer must receive duplicate copies of all transactions made in the account if requested D) opening member must notify the employee, in writing, that the employer will be notified of the employee's intent to open the account

The employing broker/dealer must be notified in writing but need not grant prior approval for the account to be opened. It must receive duplicate confirms and account statements if it has requested them.Reference: 5.1.5.1 in the License Exam Manual.

order memorandum

The form completed by a registered representative that contains customer instructions regarding an order's placement. The memorandum contains such information as the customer's name and account number, a description of the security, the type of transaction (e.g., buy, sell, or sell short), and any special instructions (such as time or price limits). Syn. Order ticket.

The "inside market" for a security is represented by the A) Lowest bid & highest offer B) Highest bid & highest offer C) Lowest bid & lowest offer D) Highest bid & lowest offer

The inside market is the spread between the highest bid price and lowest ask price in a quoted financial product.

Commercial paper, bankers acceptances and large time deposits are part of what segment of the fixed income market? A) Corporate bonds B) Asset-backed C) Municipal D) Money market instruments

The money market involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper. An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank. Money market investments are characterized by safety and liquidity, with money market fund shares targeted at $1. The banker's acceptance is a short-term loan that is guaranteed by a bank. Used extensively in foreign trade, a banker's acceptance is like a post-dated check and serves as a guarantee that an importer can pay for the goods.

The Argo Corp. Debentures have a yield to maturity of 3.35% and a yield to call of 2.65%. Which of the following statements is true? A) The current yield is higher than the nominal yield B) The bond is trading at a discount C) The nominal yield is higher than the YTM D) The YTM is 70 basis points lower than the YTC

The nominal yield is higher than the YTM - It's trading at a premium

The price range on a particular day for the stock of XYZ Company is shown below: XYZ Co. High 26 Low 24.25 Close 25.50 If a client had placed a day order to buy 100 XYZ at 24 before the market opened, at what price would he buy the stock? A) 24.25 B) 23.87 C) The order was not filled D) 24

The order was not filled: A buy limit order at 24 would not have been filled this order would have been executed only if the price reached 24 or lower. The stock traded between 24.25 and 26 throughout the day.

reinvestment risk

The risk that a decline in interest rates will lead to a decline in income from a bond portfolio

Breakpoint Sale

The sale of mutual fund shares in an Amount just below the level at which the purchaser would qualify for reduced sales charges. This violates the Conduct Rules.

Short Tender Rule

The short tendering rule prohibits short tenders in response to a tender offer. Typically, a tender offer states the total number of shares to be purchased and also reserves the right to accept by lot; on a first-come, first-served basis; or pro rata in case of oversubscription.

n a public offering at $9 per share, the underwriting spread is $1. The issuer receives how much per share? A) $10 B) $8 C) $7 D) $9

The underwriter is offering the shares to the public at $9 per share. For every share the underwriter sells it keeps the $1 spread. The remaining $8 proceeds from every share go to the issuer.section 9.5.1

Yield Curve

The yield curve graphs interest rates against time until maturity. Typically we use treasury securities with different maturity dates to create the visual graph. the longer the maturity, the higher the yield. Normal Yield Curve -This is the most common yield curve and is indicative of normal economic times. Inverted yield curve: -short term treasuries are actually paying a higher yield than the long-term treasuries. Flat Yield Curve -an inverted or actually a flat yield curve on the far right-side there, is an indication that a recessionary period is either coming or has already arrived.

If a time in force order instruction is not given, the default usually is A) Immediate-or-cancel order B) Day order C) Good-til-date order D) Good-til-cancelled order

Time in force is a special instruction used when placing a trade to indicate how long an order will remain active before it is executed or expires. (By default, the time in force for orders is set to "Day.")

Going Public-Underwriting Timeline

Timeline: 1. Lets go public 2. Hire an investment bank to underwrite the deal "Bookrunner" "Lead Left" "Managing Underwriter" 3. Other firms join the Syndicate Syndicate members "co-managers" *** Selling Group 4. Firm Commitment Financial Liability OR Best efforts No Financial liability - All or none -Part or none 5. Underwriters sell shares UW can stabilize at or below IPO price to prevent a decline in price.

Types of Offerings

Timing 1. IPO-> The first time a company offers its shares to the general public (typically happens one time) 2. Follow-on offering -> Any subsequent offering of securities to the public (after the IPO) ---------------------------------- Proceeds 1. Primary offering -> The company is creating new shares to sell and receiving all proceeds from the sale. 2. Secondary offering -> Existing shareholders (e.g., founders, executives, VC) are selling the shares and receiving the sale proceeds (no cash for company). 3. Split offering -> Both the company and selling shareholders sell shares (e.g., Split IPO = Company sells and VC exits)

Qualified Institutional Buyer (QIB)

To be this type of buyer, investors must pass this three part test: 1. Eligibility is limited to insurance companies, registered investment companies, pension plans, corporations, and registered investment advisers 2. Buyer must be purchasing for its own account or for the account of other QIB's 3. The buyer must own and invest at least $100mm of the securities of issuers that are not affiliated with the buyer. Typically, a QIB is a company that manages a minimum investment of $100 million in securities on a discretionary basis or is a registered broker-dealer with at least a $10 million investment in non-affiliated securities.

Payment for Securities

Trade date = Date trade was placed ie Monday May 1st Settlement = T+2 wed may 3 Reg T deadline = 2 additional business days after settlement

Which of the following securities is quoted on a discounted yield basis? A) Treasury note B) Treasury bond C) CMO D) Treasury bill

Treasury bills are quoted on a discount yield basis while the other choices are quoted at a price. Since yield is inversely related (moves opposite) to price, the higher yield (5.90) represents the lower price and is the bid.

Which of the following investment company types does not have an investment advisor? A) Closed end company B) REIT C) Open end company D) Unit investment trust

Unlike other types of investment companies, such as mutual funds, UITs are passive and are not managed. UITs do not have an investment adviser that determines an investment strategy or manages portfolio holdings.

follow-on offering

an issue of share by a public company that is already listed on an exchange (FPO) raise additional equity capital in the capital markets through stock issues

12b-1 fees

annual fees charged by a mutual fund to pay for marketing and distribution costs

Ms. Madden meets with her registered rep to discuss her portfolio. She believes the economy will peak in the near-term and then move into a recessionary period. She indicates she'd like to move her portfolio into a more defensive allocation, but remain in equities. The proposed defensive stock portfolio might include securities from each of these industries except A) Food & beverage B) Construction C) Pharmaceuticals D) Water & electric

Utilities: Water, gas, and electric utilities are needed in all phases of the business cycle. Utilities are usually classified as US Large Value. Implementation: In our Core 60 portfolio, we might use 25% or more of a utilities fund as part of our US Large Value allocation. This means that 2.75%+ out of the 10.5% allocated to US Large Value might be in utilities. Consumer Staples: Everyday products that are still bought even in recessionary times. These include companies that manufacture food, beverages, household and personal products, and packaging. Consumer staples are generally classified as US Large Value, but there are some funds that are considered US Small Blend. Implementation: In our Core 60 portfolio, we might use 25% or more of a consumer staples fund as part of our US Large Value or US Small Blend asset classes. Health Care: Health care and medicine is always important to people. Health care includes hospitals, pharmaceutical companies, manufacturers of medical equipment & supplies, and long-term care facilities. Health care is generally classified as US Large Blend, but there are some funds in US Small Blend. Implementation: In our Core 60 portfolio, we might use 25% or more of a health care fund as part of our US Large Growth, US Large Blend or US Small Blend asset classes.

which of the following types of accounts would be least appropriate for a buy and hold investor?

Well, if you're a buy and hold, you probably wouldn't wanna be in a fee-based account. In a fee-based account, the customer pays a flat fee for as many trades as they want. What's the problem there? Well, if you're just buy and hold, you're probably not doing that many trades and so you're likely paying a higher amount per trade than you would for example, in a commission-based account.

a client buying $300 of stock in the margin account, long margin account. What's the initial margin requirement here?

Well, it's only $300. FINRA is a hundred percent under 2000. And so I want you taking away as a general matter. initials always 50%. Small ball, FINRA says hundred percent up to 2000.

Econ Question All of the following equity investments have heightened sensitivity to changes in interest rates, except. A. Utility Stocks B Reits C Growth Stocks D Preferred Stocks

Which of these is not gonna be as sensitive to changes in interest rates. growth stocks -gonna take their profits and reinvest in the company. utility stocks, REITS, preferred stocks - all pay normal dividends. In a dividend-paying instrument, when interest rates change, the relative value of these dividend-paying stocks likewise, change. You'd probably rather have the bond because you have a legal right to that interest payment, as opposed to the promise on the preferred stock. Because their dividends are not a legal contractual right.

Rule 144A-QIB

Who raises capital? Any Business How much? Unlimited How often? No Limit Who can invest? Qualified Institutional Buyers (QIB) Define a QIB: Institutions with at least $100m in discretionary assets

Rule 147- Intrastate

Who raises capital? In-state business (either 80% rev, assets, net proceeds, or majority of employees based in that state) How much ? Unlimited How often? No Limit Who can invest? In-State Residents Sell-across state lines? After 6 months

Client buys $30,000 of stock in our margin account. what is your initial requirement and what rule is in play?

You need to put up 15,000 and that's gonna be Reg T.

Which of the following statements is true of warrants? A) Warrants are issued to make a security offering more attractive. B) Warrants give the holder a perpetual interest in the issuer's stock. C) Warrants are shorter term than rights. D) Warrants are safer than corporate bonds.

Your answer, Warrants are often issued with other securities to make the offering more attractive., was correct!.Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants are long-term options to buy stock, and because they are equity securities, warrants, as investments, are considered less safe than bonds.Reference: 1.7.2 in the License Exam Manual.

The customer new account form is typically signed by the A) Designated registered rep B) Firm compliance officer C) Customer D) Designated principal

[D] The Branch Office Manager or Principal of the Firm Registered Representatives, Customers and compliance officers are not required to sign the new account form. The Form must be signed by the Branch Manager or Principal of the Firm. (Formerly RR's were required to sign but that rule has been changed).

standby underwriting

a commitment by an underwriter to purchase any shares that are not subscribed to in a rights offering.

closed-end fund

a mutual fund with a fixed number of shares that are issued by an investment company when the fund is first organized

public offering price

a.k.a., "POP,' the price an investor pays for a mutual fund or an initial public offering. For a mutual fund= NAV + the sales charge.

ROTH IRA

an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59½ are tax-free.

An underwriting firm takes on risk in all of the following underwriting types EXCEPT a(n) A) competitive bid B) all-or-none C) standby D) firm commitment

competitive bid - by primary dealers when purchasing government securities in Treasury auctions all-or-none no risk standby - Underwriters have a firm commitment responsibility in which of the following firm commitment - The underwriters purchase all securities directly from the issuer, The securities are purchased from the issuer at a price below the public offering price, The securities are offered to the public at the price specified in the prospectus

YTM (yield to maturity)

compound annual rate of return earned on a debt security purchased on a given day and held to maturity

Asset Backed Securities could be backed by all of the following EXCEPT A) corporate equipment B) auto loans C) credit card receivables D) student loans Previous

corporate equipment

Equity REIT

earns income for its investors through rent collection or the sale of the properties in their portfolio

A bond is quoted at 99 1/8. From this quote, which of the following can be reasonably concluded? I. The bond is a corporate bond II. The bond is a government bond III. An investor would pay $991.25 to purchase the bond at the current market price IV. An investor would pay $99.125 to purchase the bond at the current market price

i. The bond is a corporate bond b/c it is quoted in 1/8 increments III. An investor would pay $991.25 to purchase the bond at the current market price

straight debt

is relatively easy to value, as we saw in the first weeks of the class. Once the bond issue is rated and a coupon rate set, it is a standard PV exercise. Straight debt can also include loans from banks or other financial institutions.

All of the following statements about municipal revenue bonds are TRUE EXCEPT: A) They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities. B) The interest and principal are paid from the revenue received from the facility. C) The maturity of the revenue bond usually coincides with the useful life of the facility being built. D) They are not subject to debt limitations established by the issuer.

no taxing district shall for any purpose become indebted in any manner to an amount exceeding three-eighths of one percent of the value of the taxable property in such taxing district without the assent of three-fifths of the voters.

lock up period

period in which investors cannot redeem investments in the hedge fund

Losses from direct participation programs can be used to offset: portfolio income. income from limited partnerships. none of these. earned income from salary or commissions. income from limited partnerships. Passive losses can be used only to offset passive income, which is earned from direct participation programs and rental real estate.Reference: 13.1.1 in the License Exam Manual

portfolio income

bake-off

process begins when the organization that is looking to launch an IPO invites potential underwriters to tour their facility to get a fair idea of the nature of the business and its operations. Later, the organization invites bids from interested bankers.J

FDIC (Checking and Savings accounts)

protects 250k cash backed by us govt

exchange traded fund

shares traded on securities markets that represent the legal right of ownership over part of a basket of individual stock certificates or other securities

blue sky memorandum

specifies the way a specific issue will be treated under state securities laws outlines the steps that must be taken to qualify the issue for sale in those jurisdictions

Convertible preferred stock

stock that permits the preferred stockholders to convert their shares into common stock

The interest income on federal agency securities is

taxed at all levels Explanation: 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. Textbook Reference: See textbook section 3.5

nominal yield

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

yield to call

the rate of return earned on a bond when it is called before its maturity date

10. Economic Factors: Gross Domestic Product (GDP) & Economic Indicators

the total market value of goods and services produced within a country, regardless of who actually produces them. Economic stabilizers can be used to increase the gross domestic product during a recession. When we believe that we are in a recessionary or depression, we have tools available, economic stabilizers to help boost gross domestic product so that we can get the economy going again. Economic Indicators: Leading Indicators: Change before the economy changes (stock market) Lagging Indicators: Change after the economy has begun changing interest rates Coincidental Indicators: Economic factors that vary simultaneously with the business cycle (GDP)

fiscal policy

the use of government spending and revenue collection to influence the economy

describe the account opening process, and required documents customers must submit

who is eligible to open a brokerage account -individual -multiple persons in one account -business entity or a corporation -Trusts -investment clubs -foreign entities who cannot? -Minors Cold-calling for potential clients is allowed -8a-9p customers time zone -anyone - people can take themselves off list -need to check own firms & FTC's do not call list - must disclose telemarketing call, rep and firms name and address/phone and reason for call ie securities solicitation -if on DNC list, cannot call even if referred by existing client Exceptions to do not call rule: - existing client of firm -provided written consent to be called -ind has personal relationship w reg rep what information is needed to open a new account: -name, address, telephone, date of birth, tax ID, citizenship status. -employed?, occupation?, insider of any public company?, an officer, a director, or an employee of a broker dealer? -can make recommendations based on best interest of client: not only have to make a suitable recommendation, but it has to be the best recommendation I have for you. -If you wanna use a number or symbol, test point, this requires a written statement of ownership.

Working Capital what is the firm's working capital?

working capital = current assets - current liabilities - inventory, securities current = converted/pid out of cash in one year

expense ratio

yearly management fees of a mutual fund expressed as a percentage of the total investment that is taken out each year