SIE Products part 3

A customer has held an account with a broker-dealer for over one year. A registered representative associated with the firm recommends the purchase of an unlisted security trading at $3.50. What documentation, if any, is required prior to the trade? A)A disclosure statement is required, but not a suitability statement. B)No documentation is required. C)Both suitability and disclosure statements must be obtained. D)A suitability statement is needed, but not a disclosure statement.

A)A disclosure statement is required, but not a suitability statement. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements when penny stocks are being solicited. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made at least three penny stock purchases of different issuers on different days.

Which of the following are TRUE of municipal revenue bonds? I-They are secured by a specific pledge of property. II-They are a type of general obligation bond. III-They are not subject to statutory debt limits. IV-They are backed by a facilities ability to generate revenue. A)III and IV B)I and IV C)I and II D)II and III

A)III and IV The 2 types of municipal bonds are GOs and revenue bonds. Revenue bonds are not secured by a specific pledge of property; instead they are backed by project revenue. Unlike GO bonds, they are not subject to any statutory debt limits.

Treasury bills A)are issued at a discount without a stated interest rate B)can be issued with initial maturities of 3, 12, 24, and 50 weeks C)have the highest interest-rate risk of all Treasury securities D)are always issued at a slight premium to par value

A)are issued at a discount without a stated interest rate Treasury bills are always issued at a discount, without a stated interest rate. Because of their short-term maturities, they have the lowest interest-rate risk for Treasury securities, not the highest. They are issued with maturities of 4, 13, 26, and 52 weeks.

The XYZ May 45 puts are trading 2.50. The current market value (CMV) for XYZ stock is $42.50. The May 45 put is A)at parity B)at the money C)out of the money D)without any intrinsic value

A)at parity The amount that an option is in the money is its intrinsic value (IV). In this case, 2.50 points (45 - 42.50 = 2.50). An option is at parity when the premium equals intrinsic value. The premium of 2.50 equals the contract's 2.50 IV; therefore, the option is at parity.

If a call contract has no intrinsic value, it must be A)at, or out of the money B)only in the money C)out of, or in the money D)at, or in the money

A)at, or out of the money If a contract has no (zero) intrinsic value, it can only be either at or out of the money. Anytime a contract has intrinsic value, it is in the money by that amount.

An investor bought a put option and, in time, the underlying security declined below the strike price of the put. The put would probably A)be exercised B)decline in value C)not be exercised D)be worthless

A)be exercised This is exactly what most put option buyers are looking for. They want the stock to go down. Because the market price of the stock declining would cause the option to be in the money, the investor would either exercise the option or sell it.

Preferred shares have A)characteristics of both equity and debt securities B)characteristics of neither equity nor debt securities C)only the characteristics matching those of debt securities D)only the characteristics matching those of equity securities

A)characteristics of both equity and debt securities Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond (debt security).

A REIT can avoid being taxed as a corporation would by A)receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders B)receiving 100% of its income from real estate and distributing 90% or more of its net investment income to its shareholders C)receiving less than 50% of its income from real estate and distributing 50% or more of its net investment income to its shareholders D)receiving less than 75% of its income from real estate and distributing 100% of its net investment income to its shareholders

A)receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders Under the guidelines set by the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders.

Treasury bills (T-bills) are A)short-term debt obligations issued weekly B)short-term debt obligations issued monthly C)intermediate-term debt obligations issued monthly D)intermediate-term debt obligations issued weekly

A)short-term debt obligations issued weekly

An investor sells short 1 MJS June 55 put at 2. The current market value of LMN is 56. The investor's maximum loss potential is A)$10,600 B)$5,300 C)unlimited D)$5,425

B)$5,300 Put sellers are bullish. Therefore, the maximum risk is if the stock falls to 0. The maximum potential loss, therefore, is the strike price less the premium received for the put (55 - 2 = 53). The maximum loss per contract is $5,300. The current market value of the stock at the time the put was sold short is of no consequence.

Your customer is long 1 October 75 put at 2. The customer's maximum gain potential is A)$2,000 B)$7,300 C)$7,700 D)$7,500

B)$7,300 The maximum potential gain for put owners is the option's strike price (75) less the amount of the premium paid (2)—in this case, 73. Note that this is the same as the contract's BE point. Remember that put owners are bearish and want to see the stock fall in price. A stock's price can potentially fall to zero; therefore, from the BE to zero (73 points) is the most that can be gained.

An investor has asked a mutual fund company for a copy of its Statement of Additional Information (SAI). How long does the fund have to comply with the request? A)SAI must go into the mail on the same day B)3 business days from the date of the request C)By end of week in which the request was received D)5 business days from the date of the request

B)3 business days from the date of the request If an investor asks for a copy of a mutual fund's SAI, the copy must go into the mail no later than the end of the 3rd business day from the date of the request. It must also be supplied free of charge

6% XYZ debentures are trading for $1,200 while similarly rated bonds are being offered at 4.5%. What is the current yield on the 6% XYZ debentures? A)6% B)5% C)7.5% D)1.5%

B)5% Current yield is defined as the annual income (or coupon rate) from a bond divided by the bond's current market price ($60 / $1,200 = 0.05 or 5%). Accordingly, the current yield (5%) is lower than the coupon rate (6%) because the bond is trading at a premium.

If a callable bond is priced at par, which of the following is TRUE? A)YTM is less than YTC. B)CY equals YTC. C)CY is greater than YTM. D)CY is less than YTM.

B)CY equals YTC. For any bond priced at par, all of the yields are equal; nominal = CY = YTM = YTC if callable.

Regarding options positions, which of the following statements is TRUE? A)Call writers may be obligated to purchase the underlying, and put writers are obligated to sell the underlying. B)Call buyers have the right to purchase the underlying, and put writers may be obligated to purchase underlying. C)Call buyers have the right to purchase the underlying, and put buyers have the right to purchase the underlying. D)Call writers have the right to sell the underlying, and put writers are obligated to sell the underlying.

B)Call buyers have the right to purchase the underlying, and put writers may be obligated to purchase underlying. Buyers of options have rights, and writers (sellers) of options may be in an obligatory positon if the buyer exercises the contract. Call buyers have the right to purchase stock, and put buyers have the right to sell stock. Call writers may be obligated to sell the stock, while put writers may be obligated to buy the stock.

If investors have income listed as their investment objective, they would NOT hold which of the following securities in their portfolio? A)Corporate bonds B)Income bonds C)Preferred stock D)U.S. T-notes

B)Income bonds Also known as adjustment bonds, income bonds pay interest only if the issuer has enough earnings to do so. They are often issued by companies coming out of bankruptcy. As a result, the interest payments providing the income to meet the objective are uncertain.

Being secured by no physical asset and backed only by a bank's good faith and credit, a bank's promise to pay principal and interest can be evidenced in which of the following securities that are traded in the secondary market? A)Commercial paper B)Negotiable certificates of deposit C)Notes and bonds D)Certificate of deposit

B)Negotiable certificates of deposit A negotiable certificate of deposit is an unsecured money market instrument issued by banks. Negotiable means that it can be traded in the secondary market and unsecured means that it is backed only by a promise to pay—a bank's good faith and credit.

Your client has a long-term investment time horizon and is willing to accept some risk to achieve a better rate of return. Of the following, which would be the least suitable recommendation? A)Corporate bonds and T-bonds B)T-bills and negotiable CDs C)Preferred stock D)Common stock

B)T-bills and negotiable CDs Given the long-term investment time horizon and the willingness to accept some risk to earn better returns, the least suitable recommendations would be short-term money market instruments, such as T-bills and negotiable CDs where the trade-off for safety is return.

A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are A)collateralized obligations B)Treasury receipts C)Treasury STRIPS D)Treasury bills

B)Treasury receipts Brokerage firms can create a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds placed in trust at a bank. They then sell separate receipts against the principal and coupon payments the notes and bonds represent.

An issuer has issued bonds with a call feature. It is likely that these bonds have A)a coupon that need not reflect the impact of the call feature B)a higher coupon than similar bonds without the feature C)a coupon that will be called away by the issuer before maturity D)a lower coupon than similar bonds without the feature

B)a higher coupon than similar bonds without the feature

An investor has purchased bonds having a put feature attached. With this put feature, it is likely that these bonds were issued with A)a higher coupon than similar bonds without the feature B)a lower coupon than similar bonds without the feature C)a coupon that need not reflect the impact of the call feature D)a coupon that will be called away by the issuer before maturity

B)a lower coupon than similar bonds without the feature When bonds are issued with features that benefit the bondholder, such as a put feature, the issuer can generally pay a slightly lower coupon rate of interest. This is because the put feature compensates the holder in another way, aside from the coupon rate.

All of the following actions must be completed before a customer enters the first option order EXCEPT A)completion of the new account form B)completion of (signing of) the options agreement C)delivery of an OCC disclosure booklet D)approval by a branch office manager or registered options principal

B)completion of (signing of) the options agreement Customers do not have to complete (sign) the options agreement before entering an order, although under the rules, the agreement must be signed and returned by the customer within 15 calendar days of account approval.

An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call realized by the investor would be A)greater than the YTM B)less than the coupon C)greater the CY D)equal to the YTM

B)less than the coupon When a bond purchased at a premium (105) is called before it matures, the accelerated premium loss is reflected in the calculated YTM and YTC. In this light, remember that the YTC is always the lowest of all possible yields for premium bonds, less than the coupon, CY, and YTM.

Short-term purchases and sales of a mutual fund to take advantage of price fluctuation is known as A)time-spotting B)market timing C)front running D)price-spotting

B)market timing The practice of market timing in mutual funds is not illegal but is rarely advantageous. Because many purchases and redemptions are involved over relatively short time periods, the sales charge lost each time the investor buys or redeems precludes making much in the way of profits. Most mutual funds in fact prohibit the practice.

Repurchase agreements and reverse repurchase agreements are A)equity instruments B)money market instruments C)intermediate-term notes D)long-term bonds

B)money market instruments Repurchase (repo) agreements and reverse repurchase agreements are short-term debt securities and are, therefore, a type of money market instrument.

For which of the following investors would Class C shares be most suitable? A)An investor interested in high-risk, high-potential return speculation B)An investor who intends to leave the money in the fund for many years C)An investor who intends to redeem the shares within a short time D)A relatively inexperienced investor

C)An investor who intends to redeem the shares within a short time Because Class C shares have no sales charge levied at the time of purchase but rather levy a withdrawal from the customer's account every quarter, they would be most suitable for an investor intending to redeem the shares relatively soon. Mutual funds are not intended for the speculative investor, those who might trade in and out frequently, and no particular share class is especially suited to the inexperienced investor.

The repayment or maturity date of a banker's acceptance is normally which of the following? A)As short as 3 months or as long as 9 months B)As short as 1 day or as long as 30 days C)As short as 1 day or as long as 270 days D)As short as 1 month or as long as 6 months

C)As short as 1 day or as long as 270 days Banker's acceptances are short-term time drafts, making them money market instruments. Maturity (payback) dates are normally between 1 day and 270 days (9 months).

Which of the following would cause a mutual fund's NAV per share to fall? I-The fund purchases securities for the portfolio. II-The fund pays a dividend to shareholders. III-The market value of the portfolio declines. IV-A large number of shares are redeemed. A)II and IV B)I and IV C)II and III D)I and III

C)II and III Paying a dividend and suffering market decline both reduce the net assets of the fund without reducing the number of shares; hence, the NAV declines. Purchasing portfolio securities simply replaces portfolio cash with an equivalent value of securities; hence the NAV remains unchanged. Redemption of shares reduces the fund's net assets, but the number of shares declines by an equivalent proportion; hence, the NAV remains unchanged.

All of the following is TRUE about local government investment pools (LGIPs) EXCEPT A)Pools are not required to register with the SEC B)LGIPs operate similarly to a money market instrument C)Investors must be provided a prospectus at or before they purchase shares in the investment portfolio D)The pool maintains a fixed $1.00 net asset value

C)Investors must be provided a prospectus at or before they purchase shares in the investment portfolio The operating characteristics of LGIPs are similar to those of money market funds, and they keep a $1.00 NAV. They are not required to register with the SEC and therefore there is no prospectus but do provide information statements, which include details of the management fees.

An investor is convinced that CDT stock will soon decline in value for a number of reasons. Which investment strategy will allow the investor to take advantage of the anticipated decline in share value with the smallest cash investment? A)Purchase a call spread B)Purchase a call option C)Purchase a put option D)Sell the company's stock short

C)Purchase a put option Purchasing a put is a basic option strategy utilized when one is bearish on a stock. If the stock declines as anticipated, the investor could exercise the right to sell the stock at the strike price and then repurchase it at its lower current market price for a profit. The premium paid to buy the put costs less than the margin required if one were to sell the stock short. Purchasing a call or a call spread are bullish options strategies.

Which of the following would you expect to have the lowest expense ratio? A)The XYZ Aggressive Growth Fund B)The QRS Stock Income Fund C)The ABC Corporate Bond Fund D)The MNO Small Cap Growth Fund

C)The ABC Corporate Bond Fund Bond mutual funds typically have lower expense ratios than stock funds, which tend to be riskier and require more sophisticated investment strategies. The ABC Bond fund is the only bond mutual fund listed. Growth funds involve equities (stock), and of course, the stock income fund specifies equities as well.

U.S. government deposits securities with a trustee against which certificates are sold representing principal only with no regular interest payments. These are known as A)Treasury receipts B)Treasury bonds C)Treasury STRIPS D)Treasury notes

C)Treasury STRIPS When the U.S. government deposits securities with a trustee, against which it issues certificates representing principal payments only, and no regular interest payments, these are known as Treasury STRIPS.

A customer investing in common equity securities could realize all of the following EXCEPT A)potential hedge against inflation B)current income via dividend declarations C)protection of principal investment D)potential capital appreciation

C)protection of principal investment While common shareholders could realize potential capital appreciation, current income via dividend declarations and a potential hedge against inflation, protection of the initial investment is not guaranteed. Common shareholders have limited liability, meaning that while they cannot lose more than was initially invested, they could still lose all of it.

All of the following describe mutual funds EXCEPT A)the portfolio is professionally managed B)various withdrawal plans may be offered for redemption of shares C)shares may be sold either on an exchange or over the counter D)funds simplify tax calculations for investors by supplying Form 1099

C)shares may be sold either on an exchange or over the counter Mutual fund shares are redeemable securities. Hence, they do not trade in the secondary market either on exchanges or over the counter. Instead, they may be purchased and redeemed only through the mutual fund company itself.

An investor holds a November 35 call that was purchased on March 3. The investor, if wanting to exercise the contract, would need to do so no later than A)the 3rd Friday of March B)1 business day after settlement C)the 3rd Friday of November D)1 business day after purchase

C)the 3rd Friday of November Options can be exercised up to and including (no later than) expiration. Options expire on the 3rd Friday of the expiry month. In this case, the 3rd Friday of November.

In order to meet federal budget needs, the types and quantity of government securities to be issued are determined by A)the chairman of the Federal Reserve Board B)the U. S. president and Congress C)the U.S. Treasury Department D)the Federal Reserve Board

C)the U.S. Treasury Department It is the U.S. Treasury Department that determines the types and quantities of government securities to be issued each week in order to accommodate budgetary needs. At the time of issue, the Federal Reserve Board acts as the Treasury Departments agent.

Listed options can be exercised by A)the holder after the expiration date B)the writer from the time of purchase until they expire C)the holder from the time of purchase until they expire D)the writer after the expiration date

C)the holder from the time of purchase until they expire Listed options can be exercised by the holder (owner, buyer, party who is long) from the time of purchase until they expire. Writers (sellers, party who is short) cannot exercise contracts. Instead, writers are assigned when the owners of the contracts exercise them.

Regarding the sale of a new issue, a customer is considered a restricted person if the person is A)working as a private investigator collecting information on the issuing firm's competitors B)a grandparent of an associated person of a member firm C)working as a salesperson who works for the issuing firm's underwriter D)working as a salesperson for a supplier of the issuing corporation

C)working as a salesperson who works for the issuing firm's underwrite Restricted persons include FINRA member firms and their associated persons, such as a salesperson working for an underwriter, plus immediate family members. Immediate family members do not include aunts and uncles or grandparents.

Commercial paper issued by corporations can have maturities as short or as long as A)1 month or 3 months B)30 days or 360 days C)1 month or 6 months D)1 day or 270 days

D)1 day or 270 days Commercial paper is issued by corporations to meet short-term cash needs. A form of money market instrument, it can have maturities as short as 1 day (literally overnight) or as long as 270 days (9 months).

Which of the following corporate bonds is backed by the securities of other corporations or those of a subsidiary? A)Mortgage bond B)Equipment trust certificate C)Debenture D)Collateral trust bond

D)Collateral trust bond Collateral trust bonds are backed by a portfolio of other securities; mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment. Debentures are backed only by the company's promise to pay (good faith and credit).

Intraday price changes due to normal market forces would be found with I-closed-end fund shares II-exchange-traded fund shares III-hedge fund shares IV-open-end (mutual) fund shares A)III and IV B)II and III C)I and IV D)I and II

D)I and II Both closed-end funds and ETFs trade in the open market and are priced by supply and demand. Open-end (mutual) funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday.

An investor looking to speculate in penny stocks would be exempt from the suitability statement requirement under which of the following circumstances? A)The investor's account is approved for margin purchases. B)The investor is already exempt from the risk disclosure requirements. C)The investor has already received the risk disclosure statement. D)The investor is an established customer.

D)The investor is an established customer. Established customers are exempt from the penny stock suitability statement requirement. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made three purchases of qualifying penny stocks that occurred on separate days and involved different issuers. No one is exempt from the risk disclosure requirements.

Which of the following characteristics are typical of an exchange-traded product? A)An ETP is an ineligible investment for retail customers, and may not be purchased on margin B)An ETP is marginable but may not be sold short C)The value of an ETP is derived by formula disclosed in the prospectus and it trades on an exchange only after normal trading hours D)The value of an ETP is derived from other investment instruments, and it trades on a national securities exchange

D)The value of an ETP is derived from other investment instruments, and it trades on a national securities exchange ETPs are priced so that the value of the product is derived from other investment instruments, such as a commodity, a currency, a share price or an interest rate. ETPs are benchmarked to stocks, commodities or indices. They are marginable and may be sold short.

Advantages enjoyed by the limited partners in a partnership might be all of the following EXCEPT A)owning an interest in an investment managed by others B)having income and expenses flow directly through to them C)having liability limited to the loss of the money invested D)being in a fiduciary position with responsibilities to others

D)being in a fiduciary position with responsibilities to others The fiduciary responsibility is borne by the GPs, not the LPs. The flow-through of income and expenses, limited liability, and having an investment managed by the GPs are all considered advantages for the LPs.

A registered representative provides financial support and housing at her home for her grandfather. Regarding the purchase of new issues, A)the RR is restricted, but her grandfather is not B)the grandfather is restricted, but the RR is not C)neither are considered restricted D)both persons are considered restricted

D)both persons are considered restricted Working for a BD, the RR is considered restricted. While grandparents of restricted persons are generally not considered restricted, anyone being provided financial support and/or living under the same roof as a restricted person (as is the case here) is also restricted.

Your customer is a limited partner in a real estate partnership. This partner has the right to do all of the following EXCEPT A)inspect and obtain copies of all partnership records B)vote with the limited partners to remove the general partner C)sue the general partner for damages resulting from any business decisions made D)choose which properties the partnership should buy or sell

D)choose which properties the partnership should buy or sell All of these are rights of the LP, except choosing the assets to be purchased for the partnership. This is a function of the general partner (GP).

An investor is long 1 July 40 call at 2. This investor A)can exercise the contract to purchase stock at $2 per share B)can exercise the contract to sell stock at $40 per share C)has the right to buy 200 shares of stock D)has paid $200 for the call contract

D)has paid $200 for the call contract An investor who is long 1 July 40 call at 2 has paid $200 premium to purchase the call. Owning the call, the investor has the right to exercise the contract to purchase 100 shares of stock at the strike price ($40).

An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell A)only after leaving (becoming unaffiliated with) the company B)under Rule 144 only after a 6-month holding period C)immediately, with no volume restrictions D)immediately, subject to Rule 144 volume limitations

D)immediately, subject to Rule 144 volume limitations Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144.

Bonds can be issued with additional features attached, making them more attractive to investors. All of the following can be considered such features EXCEPT A)puttable B)callable C)convertible D)maturity

D)maturity The features most commonly attached to a bond issue would be having the bond be callable, puttable, or convertible. Each of these features in its own way might make the issue more attractive to an investor. All bonds have a stated maturity, and as such, this would not be considered an additional feature.

The owner of a listed put equity option has the right to A)buy the stock at the strike price. B)Buy another put at discount C)Sell another put at a premium D)sell the stock at the strike price.

D)sell the stock at the strike price. The owner of a put (long) purchased the right to sell (to put) the stock at the strike price to those who are short the option. The exercise of their put is an instruction to assign the writer of the put, meaning the writer (short) must fulfill their obligation to buy the stock at the strike price.

The party who is short an option contract is known as A)the party with the right to exercise and receives the premium B)the party with the right to exercise and pays the premium C)the writer and pays the premium D)the writer and receives the premium

D)the writer and receives the premium The party who is short an option contract is the seller of the contract. This party is known as the writer of the contract and receives the premium when the contract is sold. Buyers have the right to exercise—that is what they are paying the premium for—and when exercise occurs, the sellers of the contract are obligated to fulfill the terms of the contract.

Exempt from the penny stock rules are A)all transactions B)solicited transactions C)both solicited and unsolicited transactions D)unsolicited transactions

D)unsolicited transactions