Simulated Exam VII

Which of the following market maker practices is strictly prohibited under FINRA rules? A) Delaying the report of a transaction at the customer's request. B) Charging a markup of more than 5%. C) Failing to display a limit order at the customer's request. D) Paying dealers a nominal amount for retail orders sent for execution.

A) Delaying the report of a transaction at the customer's request. Explanation FINRA rules strictly prohibit delaying the reporting of a trade at the customer's request. A customer may make a no-display request, in which case the limit order need not be displayed. A markup of more than 5% is allowed if it can be justified. Paying another broker/dealer to direct trades is not prohibited if the practice is disclosed to the customer (payment for order flow).

All of the following are fixed option contract terms EXCEPT the: A) premium in a stock option. B) units of currency in a currency option. C) expiration month in a debt option. D) multiplier in an index option.

A) premium in a stock option. Explanation The premium is not a predetermined characteristic of the option contract. The premium continually changes throughout the life of the option; reflecting changes in the price of the underlying security, dividends (if any), and interest rates.

In a new margin account, if a customer buys 300 XYZ at 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the Regulation T margin requirement is: A) 7350. B) 7200. C) 6900. D) 7500.

B) 7200. Explanation The Regulation T requirement for purchasing $14,400 (300 × 48) of stock is 50%; $7,200. The Regulation T requirement for writing covered calls is zero. Therefore, the Regulation T requirement for establishing both of these positions is $7,200. Note that this question asks for the regulation T requirement, not the deposit that must be made. The margin call (deposit) would be $6,900 because the requirement is reduced by the $300 premiums already received into the account for the calls. After depositing $6,900, the customer will have $7,200 in the account which meets the requirement.

Which of the following statements regarding nonsystematic risk are TRUE? I. It is the risk that an individual stock will not perform well. II. It is the same as market risk. III. Diversification reduces it. IV. Diversification does not reduce it. A) II and IV. B) I and III. C) II and III. D) I and IV.

B) I and III. Explanation Nonsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most nonsystematic risks.

Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction? A) Lowest bid. B) Lowest ask. C) Highest bid. D) Highest ask

B) Lowest ask. Explanation Markups are always based on the inside offer which is the lowest ask price in a particular security. Markdowns are based on the inside bid which is the highest bid price for a particular security.

SSS Corporation's total assets amount to $780,000 of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is SSS Corporation's shareholders' equity? A) $1,150,000. B) $980,000. C) $410,000. D) $170,000.

C) $410,000. Explanation Total assets minus total liabilities equals shareholders' equity ($780,000 - $370,000 = $410,000).

Under the provisions of Rule 147, what percentage of an issuer's gross business revenues must be derived from sales within the company's home state? A) 0.9. B) 0.7. C) 1. D) 0.8.

D) 0.8. Explanation One of the provisions of Rule 147 states that at least 80% of an issuer's revenues must be derived from the company's home state.

A customer asks a registered representative while speaking on the phone to send duplicate confirms and statements to an outside Investment Advisor. The RR should? A) Note the request on the account form and follow the instructions immediately. B) Deny the request, as this would require a power of attorney. C) Send an instruction to the registration and processing department for immediate execution. D) Ask that the request be made in writing in order to have the firm abide by the request once received.

D) Ask that the request be made in writing in order to have the firm abide by the request once received.

Which of the following statements regarding both traditional and Roth IRAs is TRUE? A) Distributions must begin in the year after the owner reaches age 70½. B) Contributions are tax deductible. C) Withdrawals at retirement are tax free. D) Contribution limits are the same.

D) Contribution limits are the same. Explanation The common factor for both traditional and Roth IRAs is that contribution limits are identical.

The Securities Act of 1934 deals with all of the following EXCEPT: A) marking sales long or short on an order ticket. B) filing an updated prospectus . C) filing of financial statements by broker/dealers. D) monitoring accounts for insider trading violations.

B) filing an updated prospectus .

A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true EXCEPT: A) the bond issue will mature within the useful life of the sewage plant. B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. C) there is no debt limitation on the issue. D) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used.

B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. Explanation This must be a revenue bond because it is not backed by the full taxing authority of the city. Rather, the principal and interest are paid by the users of the facility. The public service commission has no approval power over revenue bond interest and principal payments.

All research reports issued by a member firm must disclose certain information. Regarding those disclosures, all of the following statements are true EXCEPT A) any control relationship with the issuer must be disclosed B) whether the member firm has any position in the security must be disclosed C) the price at the time the original recommendation was made must be disclosed D) the name of the member firm providing the recommendation must be disclosed

B) whether the member firm has any position in the security must be disclosed Explanation The source of the recommendation, the security's price, and that the member firm is a market maker in the security, as well as if a control relationship exists between the member and the company being recommended, must be disclosed in the research report. However, only positions in the issuers securities of 1% or more need be disclosed.

A customer buys a real estate limited partnership interest by contributing $20,000 and signing a nonrecourse note for $50,000. The customer's beginning basis is: A) 30,000. B) 50,000. C) 70,000. D) 20,000.

C) 70,000. Explanation Generally, nonrecourse debt does not add to basis because the limited partner is not responsible (at risk) for the repayment of the debt. However, in real estate partnerships, the at-risk rules do not apply, and therefore, add to basis in this type of partnership.

All of the following are characteristics of unlisted options EXCEPT: A) premiums determined by participants. B) negotiated expiration dates. C) active secondary trading. D) negotiated exercise prices.

C) active secondary trading. Explanation Unlike listed options, unlisted options do not trade continuously in an organized secondary market; trades are negotiated between individuals.

Tax-equivalent yield

corporate rate x (1 - investors tax bracket)

Which of the following orders would be executed in a rising market? I. Buy stops. II. Buy limits. III. Sell limits. IV. Sell stops. A) I and III. B) II and IV. C) I and IV. D) II and III.

A) I and III. Explanation Buy limits and sell stops are entered below the current market and would be executed if the market were falling. Sell limits and buy stops are entered above the current market and would be executed if the market were rising.

The transfer agent of a mutual fund: I. redeems shares. II. sells shares. III. holds custody of fund securities. IV. handles name changes of mutual fund ownership. A) I and IV. B) II and IV. C) I and III. D) II and III.

A) I and IV.

A customer buys 300 LMN at 45 and writes 3 LMN Aug 45 calls at 4. The customer will profit under all of the following circumstances EXCEPT if LMN: A) is below 41 at expiration. B) remains at 45 through expiration. C) rises and the calls are exercised. D) is between 41 and 45 at expiration.

A) is below 41 at expiration. Explanation Breakeven is 41 (45 − 4). If the stock is below 41 at expiration, the customer will incur a loss.

An investor, long 100 shares of XYZ at 23.50, writes 1 XYZ May 25 call at 2. At expiration, if XYZ is trading at $20, the investor has a: A) loss of $150. B) loss of $50. C) gain of $50. D) gain of $150.

A) loss of $150. Explanation Breakeven is 21.50 (23.50 − 2). If the stock is trading at 20, the customer has an unrealized loss of $150.

A callable municipal bond maturing in 30 years is purchased at 102. The bond is callable at par in 15 years. If the bond is called at the first call date, the effective yield earned on the bond is: A) lower than the yield to maturity. B) higher than the yield to maturity. C) not determinable. D) the same as the yield to maturity.

A) lower than the yield to maturity. Explanation If the bond is trading at a premium and it is called before maturity, the loss of the premium is compressed into a shorter period of time. This reduces the effective yield on the bond. If the bond is called, the effective yield is the yield to call.

An agency cross transaction in the OTC market occurs when a broker/dealer: A) matches a customer buy order with a customer sell order on the same stock at the same price and charges each side a commission. B) matches a customer buy order with a customer sell order on the same stock at the same price and charges each side a mark-up and mark-down, respectively. C) buys stock on an exchange and immediately sells it in the third market. D) invests the proceeds of a customer sale in another OTC stock.

A) matches a customer buy order with a customer sell order on the same stock at the same price and charges each side a commission.

If a stock is sold on November 30 when the record date for a dividend distribution is December 1, the seller is: I. entitled to the dividend if the trade is done regular way. II. not entitled to the dividend if the trade is done regular way. III. entitled to the dividend if the trade is done with cash settlement. IV. not entitled to the dividend if the trade is done with cash settlement. A) II and III. B) I and IV. C) I and III. D) II and IV.

B) I and IV. Explanation Anyone who owns the stock on the record date will receive the dividend. In a regular way trade, the seller will still be owner of record on record date, as the trade will settle after the record date. In a cash settlement transaction, the buyer will be owner of record on record date.

The following items are all correct statements regarding liquidity EXCEPT: A) a liquid asset can easily be converted to cash. B) it is the inability to find willing buyers for an asset. C) the most liquid of assets is cash. D) liquid assets include CDs and Treasury bills.

B) it is the inability to find willing buyers for an asset. Explanation Liquidity and marketability are often used synonymously. Liquidity is the ability to turn an asset into cash whereas marketability is the ability to easily find buyers for an asset. If an asset is easily marketable this would imply that it is also liquid.

In a rising market, all of the following strategies are appropriate EXCEPT: A) short puts. B) short stock/short put. C) long calls. D) debit call spreads.

B) short stock/short put. Explanation Investors who short stock have sold borrowed shares, and profit when the market price declines

An employee of another broker/dealer would like to open an account with your firm. Under FINRA rules, all of the following statements regarding the employee and the account are true EXCEPT A) if the employer requests them, they must receive duplicate copies of all account transactions B) the broker/dealer holding the account must approve each transaction before entry of the order C) the employer need not grant prior written approval to open the account D) the employer must be notified in writing of the opening of the account

B) the broker/dealer holding the account must approve each transaction before entry of the order Explanation FINRA rules do not require prior approval of individual transactions by the broker/dealer (at which the account has been opened). The rules do require that the employing broker/dealer be notified before the account is opened in writing and that duplicate copies of account statements and transaction confirmations be supplied if the employing BD has requested them. Prior approval of the employing BD to open the account is not required.

Tax-equivalent yield example: Your client is considering 2 bonds: an ABC Corporation mortgage bond with a yield to maturity of 9% and a municipal bond issued by his state. If your client is in the 32% tax bracket, what is the tax-free equivalent yield for the municipal bond? A) 0.0215. B) 0.0822. C) 0.0612. D) 0.041.

C) 0.0612. In this case .09 × (1 − .32) = .0612 or 6.12%.

Your customer has purchased $40,000 of stock in a new margin account and deposits the required Regulation T amount into the account. At the end of the month, the broker/dealer charges the client interest on the monies borrowed in the amount of $133.00. At the end of the month, the value of the stock drops to $36,000. The month end statement for this client will show a debit balance of: A) 18867. B) 15867. C) 20133. D) 16133.

C) 20133. Explanation A decrease in the value of the position will not affect the client's debit balance. The margin call on this account would be the Regulation T requirement of 50% of the purchase price. Any interest charges will be added to the client's debit balance.

Of the following customer services, which must a broker dealer provide with no service charge? A) Loans made to customers B) Safekeeping of customer's securities, exchanges, or transfer C) Forwarding of proxy material to the customer D) Collection of customer's interest or dividends

C) Forwarding of proxy material to the customer Explanation The Conduct Rules permit FINRA members to charge reasonable fees to their customers for a variety of services. Included in chargeable services are the collection of interest and dividends, finding a buyer for a client who wishes to sell a relatively illiquid investment, and holding customers' securities in safekeeping. Members may also charge interest on loans made to customers. However, the expenses associated with sending proxy statements to customers whose securities are being held in trust by the member cannot be charged to the customer. Instead, the member may seek (and receive) reimbursement from the issuer for these expenses, since the issuer would have incurred these expenses had the customer/shareholder been holding the securities directly.

Which of the following would protect a short May 50 call? A) Long April 45 call. B) Long April 55 call. C) Long June 45 call. D) Long June 55 call.

C) Long June 45 call. Explanation For a long call to cover a short call, it must have the same or lower strike price and the same or longer expiration. This ensures the investor may purchase the stock without financial loss and deliver it at 50 if the short call is exercised.

In a contested proxy (proxy contest) solicitation, all those soliciting proxies from shareholders must register with A) FINRA B) NSCC C) SEC D) FRB

C) SEC

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

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

Which of the following would have the least impact in marketing a municipal bond issue? A) The maturity of the issue. B) The size of the block offered. C) The dated date of the issue. D) The rating of the issue.

C) The dated date of the issue.

An upward sloping yield curve represents all of the following EXCEPT: A) inflation expectations. B) time value of money. C) foreign interest rate differentials. D) increased risk of default over time.

C) foreign interest rate differentials. Explanation Foreign interest rate differentials are not reflected in an upward sloping yield curve. Interest rate differentials between countries reflect differences in domestic monetary and fiscal conditions. The time value of money is reflected in the upward sloping yield curve.

In a discretionary account, due diligence requires a member to receive prior written consent before purchasing nonconventional investments (NCIs). All of the following are considered NCIs EXCEPT: A) Distressed corporate debt. B) Hedge funds. C) Equity linked notes. D) Corporate bond funds.

D) Corporate bond funds. Explanation Equity linked notes, debt issued by corporations that have filed for bankruptcy or are considering filing for bankruptcy, and hedge funds are all examples of investments that carry unique risks that an investor needs to be aware of. Therefore, before purchasing these types of investments in a discretionary account, proper due diligence by the broker/dealer requires that the customer provide prior written consent.