SIE Final Review
An individual purchased a corporate bond and is told that he's required to pay the market price of the bond plus the interest that is owed to the seller. The amount of interest due will be calculated on a(n):
30-day month and 360-day year basis -Corporate and municipal bonds calculate accrued interest on a 30-day month and 360-day year basis. However, Treasury notes and Treasury bonds use the actual days in a month and a 365-day year basis. Accrued interest is calculated from the most recent interest payment date and then up to but not including the settlement date for the purchase.
An individual intends to invest in an income mutual fund. He's told that the sales charge is 4.25% and the current NAV is $9.65 per share. What's the fund's public offering price (POP)?
$10.08 -The formula for finding POP is NAV ÷ (100% - sales charge %). Based on the information given, the public offering price is $10.08 ($9.65 ÷ [100% - 4.25%]).
The annual limit for gifts or gratuities that are made to employees of other member firms is:
$100 -The annual gift or gratuity limit is $100. Keep in mind, gifts cannot be based on achieving a specific sales level.
An issuer has decided to repurchase some of its own shares. The stock's current quote is 17.25 Bid, 17.40 Ask, and the last independent transaction was 17.30. What's the highest price at which the issuer is permitted to purchase its stock?
$17.30 -According to SEC Rule 10-b-18, to avoid the possibility of a company manipulating the market price of its own stock when it repurchases any of the shares, the company may not pay more than the last independent transaction or the last independent bid, whichever is higher. Since the last independent transaction was $17.30 and the last independent bid was $17.25, the issuer may not pay more than $17.30.
A client buys 400 shares of ABC stock at $25 per share and pays a commission of $220. What's the adjusted cost basis per share?
$25.55 -The adjusted cost basis of the stock is determined by starting with the total investment price, then adding any commissions or allowable expenses, with further adjustment made if the stock has split since the original purchase, and then dividing by the number of shares owned. In this case, the client invested $10,000 (400 shares x $25), but also paid a commission of $220. Therefore, the total investment equals $10,220. Now the $10,220 is divided by 400 shares to determine the adjusted cost basis per share of $25.55.
A bond with a 4% coupon was originally issued at $1,010, but is currently trading at a price of $975. If the bond is callable in three years at $1,025, how much interest will a bondholder receive each year?
$40 -The formula for determining the amount of interest a bondholder receives each year is par multiplied by the coupon rate. In this question, the annual interest is $40 ($1,000 x 4%). Keep in mind, the original issue price, the current market price, and the call price are each irrelevant to answering this question.
The American Utility Company of Ohio is offering $750 million of 8% bonds at a price of 99.25% of par value. An investor who buys the bonds will receive yearly interest of:
$80.00 per $1,000 of face amount -The bonds have a coupon rate of 8%, which means that they pay 8% of their par value ($1,000 x 8%), which is $80 each year in interest payments
The price for a Treasury bond with a principal value of $1,000 is 94-18. What's the dollar price of this bond?
$945.63 -Treasury notes and Treasury bonds are quoted as a percentage of par along with a fraction. The fractions are in 32nds. However, bond prices may be stated as a percentage along with a fraction. To make pricing easier, the fraction should be converted to a decimal (i.e., divide the numerator by the denominator). In this case, 94-18 (or 94 18/32) becomes 94.5625%. A bond priced at 94.5625% of par is equal to $945.63.
A U.S. Treasury note is quoted at 97.01 Bid, 97.05 Ask. If an investor purchases a $1,000 Treasury note, he will pay:
$971.56 -The pricing of Treasury notes and Treasury bonds is shown with a percentage of par and a fraction. The fraction for Treasury notes and bonds is in 32nds of a point. In this example, the bid represents 97 and 1/32, while the ask represents 97 5/32. For pricing purposes, 1/32 is equal to .03125% (i.e., 1 ÷ 32) of par. The note would be purchased at its ask price of 97.05, which is 97.156% of par (5 ÷ 32 = .156). In this case, $1,000 x 97.156% = $971.56.
A no-load fund may cover expenses related to fund promotion and distribution by using:
12b-1 fees -Mutual funds use 12b-1 fees to cover basic promotion charges and distribution expenses. A no-load fund cannot assess either a front-end or deferred sales charge, but can assess a 12b-1 fee as long as it doesn't exceed .25% of the average annual net assets.
The account of a specified adult has been placed on a temporary hold due to a concern of financial exploitation. For how long will the hold generally remain in effect?
15 business days -The initial temporary hold will expire in 15 business days. However, if a firm's review supports the reasonable belief that financial exploitation has occurred, is occurring, or may occur, it may extend the temporary hold for an additional 10 business days.
An individual has failed a qualifying exam three times. How long must this person wait before he can retake the exam?
180 days -If an individual fails a qualifying examination on his third attempt, he must wait 180 days (six months) before he can retake the exam. The waiting period between the first two attempts is 30 days. (10368)
A convertible bond was issued at par, but is now selling in the secondary market at 95. The bond has a conversion price of $50 and the stock is trading at $45. If the bond is converted, how many common shares will be received?
20 -The conversion ratio of a convertible bond (the number of shares received upon conversion) is calculated by dividing the par value by the conversion price ($1,000 ÷ $50 = 20 shares). The current market value of the bond and stock are not used to determine the conversion ratio.
An options investor has purchased an ABC June 60 Call at 5. If the market price of ABC is 63, what's the intrinsic value of this option?
3 -Since the market price of ABC (63) is 3 points above the strike price of the call (60), the option is in-the-money by 3 (which also means that it has intrinsic value of 3). By whatever amount an option is in-the-money, that's the amount of intrinsic value it has.
A mutual fund has an NAV of $17.50 and a POP of $18.25. What's the sales charge?
4.1% -The formula for calculating the sales charge is (POP - NAV) ÷ POP. For this question, ($18.25 - $17.50) ÷ $18.25 = 4.1%.
If no order qualifier is given, an order is assumed to be:
A day order -Without any qualifier on an order, it's assumed to be a day order. Good-til-cancelled (GTC) orders and open orders are synonymous. A not held order is one which allows a broker to assume unwritten discretion over the price and/or time of execution.
A company has existing stockholders and wants to sell more stock to the public. If new stock is made available, what type of offering is this considered?
A follow-on offering -The additional offering of shares is considered a follow-on offering. Although the shares would be offered in the primary market, it's not considered an initial public offering (IPO) because the company had issued stock previously. A secondary offering involves an issuer selling shares of its existing stockholders. A split offering is a combination of a primary (proceeds to issuer) and secondary offering (proceeds to existing shareholders).
Allowances for gifts or reimbursements that are made by fund wholesalers to registered representatives may include which of the following?
A gift certificate valued at $100 for a sporting goods store -In general, registered representatives (RRs) may not receive compensation (either cash or non-cash) from any person other than their broker-dealer for investment company or variable product sales. However, there are certain exceptions. One exception allows RRs to receive gifts from a person who's affiliated with a distributor if the gift is worth no more than $100. In addition, the gift may not be conditioned on the attainment of a sales target. Another exception allows RRs to receive reimbursement from distributors for attending meetings that serve an educational function if several conditions are met. RRs must have their broker-dealer's permission to attend the meeting, attendance cannot be tied to the achievement of a sales target, and the location of the meeting must be appropriate (e.g., the office of the distributor or the broker-dealer). Lastly, payments or reimbursements for guests of RRs (e.g., spouses) are not permitted.
Which of the following individuals is NOT required to be fingerprinted?
A non-registered person who processes orders for a firm that sells only mutual funds -Most employees of a broker-dealer are required to be fingerprinted, which includes all registered personnel. However, this requirement doesn't include: 1) non-registered personnel who process orders for non-certificate securities (e.g., mutual funds and annuities); 2) associated persons who don't sell securities, don't have access to funds, securities, or books and records, and don't supervise persons who sell securities or have access to the above.
An offer to the existing stockholders of a company which allows them to purchase additional stock in advance of a public offering is referred to as:
A rights offering -A rights offering provides a company's existing shareholders the right to purchase additional shares in order to maintain their percentage of ownership. This is also referred to as an anti-dilution provision.
What supports the principal and interest payments for corporate debentures?
The full faith and credit of the issuer -Debentures are a form of unsecured debt and are only backed by the full faith and credit of the issuer.
If there's a dispute between two broker-dealers, how is it resolved?
Arbitration -Any dispute between broker-dealers will be resolved by arbitration, not by court action, a class action suit, or SEC litigation. Arbitration is one condition that a firm agrees to use when becoming a member firm of FINRA. The Code of Procedure is the process used to discipline individuals or member firms who violate FINRA rules.
A new issue can be purchased for each of the following accounts, EXCEPT:
An account in which 15% of the ownership is by restricted persons -This question addresses possible exemptions from the New Issue Rule. A new issue can be sold to the account of a registered investment company, the account of an underwriter of an offering that was undersubscribed, and the account of a registered representative of a firm that's the issuer of the securities and is directing some of the stock to its employees. However, an account in which more than 10% of the ownership is by restricted persons is prohibited from purchasing new issues.
According to Regulation T, margin account customers who purchase securities must deposit:
At least 50% of the market value of the transaction within four business days of the transaction -To cover a margin purchase as specified by Regulation T, a customer must deposit at least 50% of the market value of the transaction within four business days of the transaction.
For a variable annuity, how often is the value of annuity units and accumulation units calculated?
At the close of each business day -Annuity units and accumulation units are similar as to when the value of open-end investment companies are calculated. The unit value of each subaccount within a variable annuity is calculated at the close of each business day. (10212)
What measure tracks all of the money in an economy due to imports, exports, and investments?
Balance of payments -The balance of payments measure tracks all of the money coming in and going out of the economy, including imports, exports, and investments. A trade deficit occurs if more money is going out than coming in, while a trade surplus occurs if more money is coming in than going out. An exchange rate represents the relative value of two currencies.
A firm that takes a position in a specific stock may be referred to by all of the following terms, EXCEPT:
Broker -When a firm takes a position in a stock, it means that it's maintaining an inventory in that stock. Firms that maintain a position and are willing to buy or sell that stock are referred to as dealers, principals, or market makers. Brokers/agents act on behalf of customers, but don't maintain positions in stocks.
If a client writes a put, what position is taken on the underlying asset of the option?
Bullish -By writing a put, the position taken on the underlying asset of the option (e.g., stock for equity options) is bullish. The writer (seller) of a put believes that the underlying issue will likely rise in value during the life of the option and hopes to avoid being exercised against. If the writer of the put is correct and the option expires unexercised, the writer will get to keep the entire premium received, which is the maximum gain.
What type of investment risk will a company experience as the result of diminished demand for its largest product in the marketplace?
Business risk -Business risk is specific to a company and is the risk that a company will not have enough income to cover its expenses. For example, if a company's main product is no longer needed in the marketplace, it will lose a main revenue source. This will adversely affect the company's financial position and may drive down the price of its stock.
A U.S. company is purchasing goods from a German company and will ultimately need to pay for the goods in euros. In order to protect itself from a stronger euro, the U.S. company may:
Buy euro calls -The U.S. company may utilize a hedging strategy, which is designed to protect it against a change in the euros value. In this example, the U.S. company is concerned about the rising value of the euro since it's required to pay for goods in euros. To protect itself, the company could purchase euro calls, which locks in the price at which the company will pay for euros. If the euro strengthens, the value of the euro calls will increase and be able to offset the cost of goods. Although selling euro puts will offer some protection, the amount of protection is limited to the premium received on their sale. (10438)
A firm has statistical and summary information about customer complaints that needs to be sent to FINRA. If today is the last day of the calendar quarter, when must the firm report this information?
By the 15th day of the next month -Member firms must report statistical and summary information to FINRA regarding written customer complaints (in as much detail as specified) by the 15th day of the month following the calendar quarter in which the complaint was received.
The risk that a bond may be redeemed by its issuer prior to the maturity date is referred to as:
Call risk -In a declining interest rate environment, bond issuers may choose to redeem their higher interest rate bonds. This tendency of issuers to buy back their higher paying bonds prior to their maturity is referred to as "call risk." Prepayment risk is associated with mortgage-backed securities (MBS) and occurs when the debt underlying the securities is paid off prior to the maturity of the MBS.
A client owns a call option to buy ABC stock at $15 per share. If ABC stock remains neutral at 14.75 and the client's option expires worthless, this is an example of:
Capital risk -This is an example of capital risk. When an option expires, the capital invested to buy the option is lost despite the fact that the underlying stock still has value. The stock price failed to rise in value enough to make the purchase of the option worthwhile; therefore, the investor loses the premium that was paid to buy the option contract. Don't confuse this with call risk, which is the risk of a bond being called prior to maturity.
An investor has written an uncovered call. The underlying stock's market price is rising and the investor is concerned about his uncovered position. What action may be taken by the investor to reduce exposure to this contract position?
Close the option position by purchasing an offsetting contract position. -To close out the position, the investor must purchase an offsetting contract with the same terms. Since a call was written to open the position, a call must be purchased to close out the position and limit his upside risk on the uncovered call. If an investor's opening transaction is the sale of an option, the closing transaction requires the purchase of the same option.
The market value of which of the following types of preferred stock is least dependent on the fluctuation of market interest rates?
Convertible preferred stock -Since convertible preferred stock is able to be converted into common stock, its price is more dependent on the changes to the price of the company's common stock than on the fluctuation of interest rates.
The inside market refers to:
The highest bid and lowest ask price -The inside market for a security represents the best (highest) bid and best (lowest) ask price. All markups and markdowns are calculated based on the inside market of a security.
A broker-dealer is quoting a security and, rather than filing a customer's order, decides to change its quote. The broker-dealer is:
Guilty of backing away. -The broker-dealer is guilty of backing away, which represents the failure to honor a firm quote.
The interest rate charged by Federal Reserve Banks for loans that are made to member commercial banks is referred to as the:
Discount Rate -The rate that the Federal Reserve charges when lending money is the Discount Rate and is the only rate that's set by the FRB. The Prime Rate is the rate that banks charge their best clients. The Call Rate is the rate that banks charge broker-dealers when they borrow money and secure the loan with the securities in margin accounts. The Federal Funds Rate (Fed Funds) is the rate banks charge one another for loans and is NOT set by the FRB.
An investor who sells stock short should understand each of the following, EXCEPT:
She must execute the short sale in a cash account. -When selling stock short, an investor is borrowing stock and will benefit if the stock drops in value (she's bearish). The potential losses for short sellers is unlimited. All short sales must be executed in a margin account.
Which of the following choices represents that an option can only be exercised on the expiration date?
European style -European style options can only be exercised on the expiration date. On the other hand, American style options can be exercised at any time either on or before the expiration date. (10240)
A client wants her registered representative to execute a trade; however, if the representative doesn't believe it's in the client's best interest, he should:
Execute the trade, but mark the order ticket "unsolicited" -The proper procedure is for the representative to discuss why he believes that the trade is unsuitable for the client and, if the client still insists on going through with the trade, execute it and mark it "unsolicited."
If information in FINRA's CRD and BrokerCheck® is found to be incorrect, the process by which it can be removed is referred to as:
Expungement -The process that's used to remove inaccurate information from FINRA's CRD and BrokerCheck® is referred to as expungement.
Which of the following is LEAST likely to result in statutory disqualification?
FINRA is reviewing a case against a person. -According to FINRA rules, a firm or individual can be statutorily disqualified as a result of certain events. These events will prevent the person or member firm from continuing to work or operate in the securities industry. Among others, statutory disqualification events include all felony (and certain misdemeanors) within the last 10 years, expulsions or bans from membership in a self-regulatory organization (SRO), bars and current suspensions ordered by the SEC, willful violations of federal securities or commodities laws or MSRB rules.
Which of the following statements is NOT TRUE regarding the yields on bonds?
For a discount bond, the nominal yield is greater than yield-to-maturity. -For bonds that are purchased at a premium and held to maturity, the order of the yields (from highest to lowest) is nominal yield, current yield, and YTM (yield-to-maturity). For bonds that are purchased at a discount, the order of the yields (from highest to lowest) is YTM, current yield, and nominal yield. In other words, the order for the discount is the opposite of the order for a premium.
A client has instructed her registered representative to pick a stock and the number of shares to buy for her account and said to execute "when you think the time is right." Which of the following statements is TRUE regarding this situation?
For the representative to execute a trade like this, discretionary authorization is required. -The action requested by the client cannot be followed without having discretion over the account. The client has directed her representative to buy, but did not specify the security or the quantity of shares. In this case, written power of attorney is required. On the other hand, if a customer specifies the action (buy or sell), asset (the specific security), and the amount (number of shares), a representative may determine the time and/or price of execution without having discretionary authority.
When a registered representative resigns from one member firm to join another member firm, what document must be prepared by the initial firm?
Form U5 -When a representative resigns from or is terminated by a member firm, the firm must file a Form U5 with FINRA and provide a copy to the employee. The form will describe the reason(s) for the representative's departure.
A REIT that invests in debt that's used to finance properties and also purchases real estate is referred to as a(n)
Hybrid REIT -A REIT that invests in both debt that's used to finance properties and also purchases real estate is referred to as a Hybrid REIT. While equity REITs purchase properties, mortgage REITs purchase the debt or mortgages on properties.
Upon receiving a written customer complaint, a registered representative must:
Immediately forward the complaint to a supervisor -If a customer complaint is received, a registered representative (RR) must immediately forward it to her supervisor. The RR should neither attempt to solve it herself nor consult with another RR. The complaint is not required to be forwarded to FINRA.
Which of the following statements is TRUE about a Joint Tenancy in Common (JTIC) account?
In this type of account, ownership may be unequal. -The Joint Tenancy in Common (JTIC) account will pass funds directly to the decedent's estate based on that person's ownership in the account. Unlike a Joint Tenancy with Rights of Survivorship (JTWROS) account where all tenants fully own the account, a JTIC allows different percentages of ownership. Although the tax ID information must only be obtained from one designated tenant, background information is required from all tenants.
An investor who purchases a variable annuity is subject to which of the following risks?
Investment risk -Variable annuities are considered securities and the investment risk is assumed by the purchaser. Variable annuities are designed to protect against inflation risk and, since they're not considered debt securities, are not subject to credit risk.
Each of the following is TRUE of the MSRB's Time of Trade Disclosure rule, EXCEPT
It doesn't apply to unsolicited trades -The MSRB's Time of Trade Disclosure rule requires broker-dealers to disclose to a client all material information that's known or reasonably accessible to the market at or prior to the trade. This rule applies to all trades regardless of where they're executed, or whether the trade was solicited or unsolicited.
Which of the following is TRUE of a proxy?
It's an authorization to vote on behalf of the shareholder. -A proxy statement is what shareholders receive before each shareholder meeting at which voting is required for an important corporate decision. A proxy describes the issues up for vote and includes a ballot. If the shareholder in question chooses not to attend the meeting and her shares are held in street name (in the name of her broker-dealer), she may return the ballot to her broker and a designated person will cast her votes as she has indicated.
Which of the following statements is TRUE regarding an income bond?
It's issued by a company that's currently in bankruptcy. -Income bonds are generally issued by corporations that are attempting to reorganize out of bankruptcy and, despite their name, don't make interest payments unless the issuer has sufficient income to do so. The bonds trade flat (without accrued interest), but their principal will be paid at maturity. Since the bonds don't pay income, they're unsuitable for investors who are seeking to supplement their retirement income.
For any customer complaints it receives, a member firm must keep a file at:
Its office of supervisory jurisdiction -According to FINRA, members must, at each office of supervisory jurisdiction, keep a file of all written customer complaints that pertain to offices under its jurisdiction. Members must also record any actions they take in response to complaints. Customer complaint records must be preserved for a period of four years.
A hedge fund generally has all of the following characteristics, EXCEPT:
Liquidity -Hedge funds pool and invest money from institutional investors as well as high net worth individual investors. Hedge fund investors pay both a management fee and a performance fee to the manager. These managers pursue all sorts of investment strategies, including those involving the use of derivatives, leverage, long and short positions, arbitrage, and other more exotic strategies. Hedge funds are illiquid investments, often with lock-up periods during which investors don't have access to their money.
Each of the following are exempt from the FINRA 5% Markup Policy, EXCEPT:
Listed stocks -The 5% Markup Policy applies to agency and principal trades involving exchange-listed and non-exchange-listed securities. However, mutual funds, variable annuities, new issues, municipal bonds, and government securities are exempt from the policy. Keep in mind, the 5% policy is a guideline, but not a rule.
When opening a margin account, a customer is NOT required to sign which of the following?
Loan consent agreement -To open a margin account, customers are required to sign a credit agreement and a hypothecation agreement. The signing of the loan consent agreement is optional (NOT required). If the loan consent agreement is signed, it permits the broker-dealer to lend the customer's securities to others who want to execute short sales.
A client has requested for her firm to sell 2,500 shares of DFG common stock. The stock is being held in street name within the client's account. As for the location of the securities, the order ticket is marked:
Long -Since the securities are being held in the client's account, the order ticket will be marked "long." The fact that the securities are in street name (in the broker-dealer's name) is irrelevant. The client is still the beneficial owner.
Diversification may reduce all of the following types of risk, EXCEPT:
Market -Market risk, which is a form of systematic risk, is non-diversifiable since all securities are subject to the risk of loss if the market is declining. Liquidity, business, and credit risk can all be reduced by portfolio diversification.
The compensation paid to a broker-dealer that's acting as a principal is referred to as a(n):
Markup or markdown -The compensation paid to a firm that's acting as a principal (dealer) is referred to as a markup or markdown. Commissions are charges levied by a firm that's acting as an agent (broker). Fees are charged by investment advisers for providing investment advice, while a sales charge is assessed on purchases of mutual funds or variable annuities.
Retail communication is defined as any written or electronic communication that's distributed or made available to:
More than 25 retail investors within any 30 calendar-day period -According to FINRA, retail communication is defined as any written (including electronic) communication that's distributed or made available to more than 25 retail investors within any 30 calendar-day period. It's important to note that a "retail investor" is defined as any person (other than an institutional investor) regardless of whether the person has an account with the firm. Therefore, the term includes both current and prospective clients.
Systematic risk is also referred to as:
Non-diversifiable risk -Systematic risk is risk that all investments are subject to and as a result, non-diversifiable. Unsystematic risk is also known as diversifiable risk, which business risk and political risk are considered types of unsystematic risks.
A shareholder who wants to receive corporate communications (e.g., annual reports and proxy materials) directly from the issuer is referred to as a(n):
Non-objecting beneficial owner -Customer stock that's held in the name of the broker-dealer is referred to as street name. However, the customer remains the beneficial owner of the stock and must receive official communications from the issuer. If the shareholder allows the broker-dealer to provide the issuer with the shareholder's name and address, he's referred to as a non-objecting beneficial owner. When the shareholder doesn't allow the release of his information to the issuer, he's referred to as an objecting beneficial owner.
A registered representative that's only associated with a limited business broker-dealer is:
Not a restricted person -A registered representative is considered a restricted person unless she's only associated with limited business broker-dealer. A limited business broker-dealer is a "broker-dealer whose authorization to engage in securities business is limited solely to the purchase and sale of investment company/variable contracts securities and direct participation program securities."
What organization guarantees the obligations, but not the price, of listed options contracts?
OCC -The Options Clearing Corporation (OCC) issues, guarantees, and clears options contracts. The guarantee for the options contract is that both parties will adhere to the contract terms and conditions, but it's not a guarantee of price or market performance. (10250)
If a municipal bond is sold on a cash basis, when will the trade settle?
On the same day as the trade -For any type of security, cash settlement is on the same day as the trade.
What's the primary difference between a qualified and non-qualified variable annuity?
Only the contributions that are made to a qualified variable annuity are deductible. -Only the contributions that are made to a qualified variable annuity are deductible (i.e., pre-tax). The payments from neither a non-qualified nor qualified variable annuity are tax-free. In a qualified variable annuity, the contributions are deductible (made pre-tax), but the earnings are tax-deferred. In a non-qualified variable annuity, the contributions are non-deductible (made after-tax), but the earnings are tax-deferred.
Whose Social Security number must be used for an account that's opened under the provisions of the Uniform Gifts to Minors Act?
Only the minor's -Since the minor is responsible for any taxes that are owed on income generated in an UGMA account, the minor's Social Security number must be used for the account.
As it relates to mutual funds, exchange privileges within families of funds are generally:
Permitted without sales charges -Exchange privileges within families of funds are generally permitted without sales charges. In other words, an investor may exchange her shares in the XYZ Growth Fund for shares of the XYZ Income Fund without incurring sales charges.
An investor has been notified by the issuer that she shouldn't plan on making a quick sale of her securities. This type of notification is often associated with a(n):
Private placement -Private placements are required to include investment letters which notify investors that the shares they purchase cannot be sold quickly in the secondary market. This is generally referred to as a "lock-up" agreement.
Which FINRA suitability obligation requires a broker-dealer that has control over a customer account to have a reasonable basis to believe that a series of recommended securities transactions are not excessive?
Quantitative suitability obligation -FINRA has established three specific suitability obligations - the reasonable basis obligation, the customer-specific obligation, and the quantitative obligation. The quantitative suitability obligation requires a broker-dealer that has control over a customer account to have a reasonable basis to believe that a series of recommended securities transactions are not excessive when taking into account the customer's profile.
When calculating the rate of return on a bond, which of the following includes the rate of inflation?
Real interest rate -The real interest rate is also referred to as the inflation-adjusted rate of return. To calculate a bond's inflation-adjusted rate or return, the rate of inflation is subtracted from the bond's nominal yield. For example, if the rate of inflation is 2.5% and a bond's nominal yield is 6%, its inflation-adjusted rate of return is 3.5%.
An investment adviser:
Receives a fee regardless of whether it executes transactions -An investment adviser is any person that provides investment advice for a fee. Advisers are entitled to this fee regardless of whether any transactions are executed. Investment advisers must register with the SEC and are subject to the provisions of the Investment Advisers Act of 1940. On the other hand, brokers receive commissions for executing agency transactions, while dealers receive markups or markdowns for executing principal transactions.
A standby underwriting arrangement may be entered into with an investment banking firm to purchase all of a company's shares that remain unsold after a(n):
Rights offering -When a company issues additional shares, it may be required to offer its existing shareholders the first right to purchase those shares through a rights offering. To ensure that all shares will be sold if not purchased by existing shareholders, the issuer may have an underwriter "standing by" to purchase any unsold shares after the rights offering is conducted.
What's the primary difference between STRIPS and Treasury receipts?
STRIPS are backed by the full faith and credit of the U.S. government, but Treasury receipts are not. -STRIPS are backed by the full faith and credit of the U.S. government; however, Treasury receipts are not. Treasury receipts are created when brokerage firms and banks purchase government-backed securities and place them in a portfolio, strip them of their coupons, and sell them as zero-coupon bonds. Both STRIPS and Treasury receipts are issued at a discount and mature at par.
A receptionist is employed by a member firm and is not a registered representative. She wants to purchase shares in an IPO that she's heard discussed in her office. Which of the following BEST describes her participation?
She's prohibited from purchasing shares of the IPO. -FINRA's New Issue Rule prohibits restricted persons from purchasing new issues. Employees of broker-dealers and their immediate family members are considered restricted persons.
A trust company, which serves as the transfer agent for a company, has received information regarding the ownership of the company's securities and wants to use this information to solicit business. Which of the following statements is TRUE regarding the trust company's ability to use this information?
Since the trust company serves as the transfer agent, it is not permitted to use this information to solicit purchases, sales, or exchanges except at the request of, and for the benefit of, the issuer. -According to industry rules, information that a firm obtains while acting in a fiduciary capacity cannot be used to solicit purchases, sales, or exchanges UNLESS it is at the request of, and for the benefit of, the issuer. As the transfer agent, the trust company is considered a fiduciary and therefore the rule applies.
When an investor either opens or closes an option position, when is the settlement date?
T + 1 -The standard settlement for either opening or closing an option position is one business day after the trade date (i.e., T + 1). Transactions involving U.S. government securities also settle on a T + 1 basis; however, transactions involving corporate or municipal securities settle on a T + 2 basis.
For trades involving either corporate stocks or bonds, the Regulation T payment date is:
T + 4 -According to the Federal Reserve Board, the Regulation T payment date is no later than the fourth business day following the trade date (i.e., T + 4). Keep in mind, regular-way settlement for corporate securities is T+ 2 business days and the customer's Regulation T payment is required to be made by no later than two business days after settlement. (10290)
All of the following are coincident economic indicators, EXCEPT:
The S&P 500 Index -The S&P 500 Index is considered a leading indicator. On the other hand, coincident indicators mirror the movements of the business cycle and are useful in confirming the state of current economic activity.
Bond prices have fallen since a corporation previously issued bonds. If the corporation plans to offer new bonds, which of the following statements is TRUE of the coupon rate on the new bonds compared to the coupon rate on the previous offering?
The coupon rate will be higher if the bonds are issued at par. -When bond prices fall, it's generally because interest rates have risen. As a result, new bonds that are offered at par value will be issued with a higher coupon than the coupon rate of the previous offering. If the coupon rate was the same, the bond would have to be offered at a discount.
If a client wants her shares held in street name, whose name will appear on the stock certificate?
The broker-dealer's name -All shares that are held in street name are actually registered under the broker-dealer's name. Generally, this is done to easily facilitate future sales.
A mother opens a UTMA account for her child. She asks her brother to be the custodian for the account and he agrees. Who's the owner of the account?
The child -For any Uniform Transfer to Minors Act or Uniform Gifts to Minors Act account that's opened, the owner is always the minor. The Uniform Prudent Investor Act allows the person who opened the account (the mother) to designate another competent person (the brother) to be the custodian (fiduciary) of the account.
What happens if a client has funds in an account that exceeds SIPC limits and the broker-dealer becomes insolvent?
The client becomes a general creditor of the broker-dealer -The Securities Investor Protection Corporation (SIPC) may not be extended beyond the basic amount per account of $500,000. If a client's account has assets exceeding the SIPC limit and the broker-dealer becomes insolvent, the client becomes a general creditor of the bankrupt broker-dealer.
The final prospectus for new issues of common stock must be delivered to the client by no later than:
The confirmation of the sale -For a new issue of stock, the final prospectus must be delivered to the purchaser by no later than the time the sale is confirmed.
In addition to a new account form, what documentation is needed to identify whether the person opening a corporate account is authorized to do so?
The corporate resolution -The corporate resolution identifies that the person opening a corporate account is authorized to do so.
A 4.65% New York City GO bond matures in 20 years. The bond is callable in 8 years at 103. Which of the following statements is TRUE?
The issuer may exercise the call provision at any time after the eighth year. -The call premium of three points ($30 per bond) refers to the amount above par value which the issuer must pay the owner of the bond if the bond is called. Issuers will typically call their outstanding bonds when interest rates decline because they're able to issue new bonds at lower rates of interest. The bond has eight years of call protection. Although the issuer will need to make an outlay of cash to call back the bonds, it will ultimately save money because of the lower rate of interest the issuer will pay on the new bonds. A call provision is exercised by an issuer, not the bondholder.
For telemarketing purposes, which of the following qualifies as a "business relationship?"
The person being contacted by a registered representative executed a transaction through a former representative at the firm 15 months ago. -If the person being contacted has executed a transaction with the representative's firm within the past 18 months, he's considered to have an existing business relationship. However, this doesn't prevent this person from requesting to be placed on the firm's Do Not Call List. An existing business relationship also exists for a period of three months following a client making an inquiry regarding a firm's products or services. Being a member of the same group as a prospective client doesn't qualify as a business relationship.
A member firm wants to hire a person who's subject to statutory disqualification. Which of the following statements is NOT TRUE?
The person cannot be hired in any registered capacity for 10 years. -If a firm wants to hire a person who's the subject of statutory disqualification, an appeal may be filed with FINRA. If FINRA allows the person to become registered and is ultimately hired, he's subject to heightened supervision.
A company declares a reverse stock split. What's the initial effect on the stock's market price?
There's an increase in the market price. -When a company declares a reverse stock split (e.g., 1-for-10), the number of outstanding shares decreases and the stock's market price increases proportionately. Reasons to execute a reverse split include increasing the value of the stock to make it more attractive than a very cheap stock, or to prevent the stock from being delisted from an exchange.
Upon the death of a trust beneficiary, where are the assets directed?
To the beneficiary's estate -The trust was established for the beneficial owner (trust beneficiary) and the funds were managed by a fiduciary or trusted person. Therefore, upon the death of the beneficial owner of the trust, the assets are directed to the beneficiary's estate.
For corporate bonds, the indenture is an agreement between the:
Trustee and issuer -The bond indenture is an agreement between the issuer and the trustee and is designed to ensure that the issuer abides by of the promises (covenants) which are contained in the document. Although the indenture is between the issuer and the trustee, the trustee is essentially representing the best interests of the bondholders.
non-registered assistant to a registered representative has been helping generate leads by calling potential customers and discussing the basic characteristics of some the investment products offered by the firm. Is this acceptable?
Under no circumstances. -The amount of interaction that non-registered employees can have with existing and potential customers is limited. They're permitted to send invitations to firm-sponsored events, call potential customers to determine whether they want to receive investment literature, and ask whether they want to speak with a registered representative. However, they cannot prequalify potential customers as it relates to their financial status, investment history, or objectives. Also, they cannot discuss general or specific characteristics of investments.
A conservative individual wants to invest in an equity fund which consists of companies that are considered a bargain. She hopes for capital appreciation in the future, but also wants income from the investment. Which of the following equity funds is the MOST suitable for her?
Value funds -Value funds are considered to be more conservative than growth funds. Value funds invest in companies that are undervalued and are expected to provide a high dividend yield. Income funds are more focused on dividends, while index funds seek to mirror the performance of an index (e.g., the S&P 500)
A broker-dealer has received a complaint which indicates that one of its representatives has stolen securities from a client. This complaint requires the firm to notify FINRA:
Within 30 days -There are numerous issues that require a firm to file a report with FINRA. If a complaint is received from a customer which indicates that a representative has stolen or misappropriated funds or securities, or engaged in forgery, FINRA must be notified within 30 days of discovery. Other events that require notification are violating securities laws, having a registration denied, suspended, or revoked, having been named as a defendant in a proceeding brought by a foreign or domestic regulator, and being indicted, convicted, or pleading guilty to a felony, or other securities or banking crimes.
A customer has just moved and notified her firm of her new address. The firm must send a copy of the revised information to the customer within what period?
Within 30 days -When there's a change to a client's account information, the broker-dealer must update its records and forward the change to the client within 30 days or at the time the next account statement is sent.
A registered representative has overheard an impending deal in which his firm will be involved, and discusses it with a friend. If his friend purchases stock ahead of the deal, is there an insider trading violation?
Yes, by both the friend and the registered representative. -Both the registered representative (the tipper) and the friend (the tippee) are in violation of the insider trading rules. Additionally, there's the possibility that the representative's firm may be in violation for failing to adequately supervise.
An individual has expressed interest in having a broker-dealer maintain his account, but wants his name removed from the account. Is this permissible?
Yes, with prior approval, it may become a numbered account.
The total rate of return that an investor will receive if a bond is held until it's called by the issuer is the:
Yield-to-call -The yield-to-call (YTC) is the total return that an investor will receive if a bond is held until it's called by the issuer.
An investor notices that a company is paying a cash dividend to its stockholders and that today is the record date on which an investor must own the stock to be entitled to the distribution. What means of settlement could the investor use to receive the dividend?
cash -If cash settlement is used, the trade settles on the same day as the trade. In this case, the investor could purchase the stock on the record date, be recognized as the owner as of that date, and be entitled to the cash dividend.
