Wrong Test Questions

One of your clients saw an advertisement for a new offering. The fine print stated that this was available solely to accredited investors. You would explain that this is a private placement being offered under the exemption provided in SEC Rule A) 506(c). B) 506(b). C) 144. D) 147.

A) 506(c). Regulation D of the Securities Act of 1933 deals with private placements. There are two options. Rule 506 (c) permits advertising, but only if 100% of the investors are accredited investors. Rule 506(b) does not permit advertising, but it does allow up to 35 nonaccredited investors. Rule 144 covers the sale of restricted or control stock, and Rule 147 is the intrastate exemption. Neither of them makes any mention of accredited investors.

Which of the following statements regarding municipal securities quotations are true? A quotation can be an indication of interest. A quotation cannot be an indication of interest. A quotation can be a one-sided request for a bid or offer (bids wanted and offers wanted). A quotation cannot be a one-sided request for a bid or offer (bids wanted and offers wanted). A) I and III B) II and III C) I and IV D) II and IV

A) I and III Municipal Securities Rulemaking Board rules pertaining to quotations cover all bona fide bids and offers, including one-sided requests for bids wanted and offers wanted, which are considered indications of interest.

Which of the following risks would least impact collateralized mortgage obligation (CMO) investors? A) Liquidity risk B) Prepayment risk C) Rate risk D) Extended maturity risk

A) Liquidity risk CMO investors are always subject to rate risk, which includes maturity and prepayment risk. Because CMOs trade over the counter, they are fairly liquid, allowing investors to purchase or sell them easily at fair market value.

When used on the exam, the term "nonexempt security" refers to a security that must register with the SEC. There are cases, however, when registration may be avoided. In most cases, that would be when the transaction involving that security is exempt. Each of the following is a transaction exemption found in the Securities Act of 1933 except A) Regulation M. B) Regulation D. C) Regulation S. D) Regulation A+.

A) Regulation M. This is a process of elimination question. There is a Regulation M under the act, but it has no relevance to your exam (which is why it is nowhere in your material). It sometimes happens that the correct answer choice is something you've never heard of. That happens most often when the question ends with the word except. Regulation A+ is the exemption for small and medium corporate offerings. Regulation D is the most significant private placement exemption. Regulation S is the exemption for offers and sales made outside the United States by both U.S. and foreign issuers.

Which of the following securities would have a Moody's MIG rating? A) TANs B) T-bills C) BAs D) GOs

A) TANs

An investor purchases a municipal bond at par to yield 5.5% to maturity. Two years later, if he sells the bonds at a price equivalent to a 5% yield to maturity, the investor incurs A) a capital gain. B) tax-free income. C) a capital loss. D) no taxable result at this time.

A) a capital gain. Yields fall as bond prices rise. Because the yield to maturity has dropped, the bond is trading at a higher price than when it was purchased. The consequence of the sale is a capital gain because the investor sold the bond that was purchased for par at a premium.

Services offered by prime brokers include all of the following except A) complying with FINRA's advertising rules. B) providing back office support. C) processing transactions. D) supplying clearing services.

A) complying with FINRA's advertising rules. Prime brokers provide services primarily to institutional investors. They have nothing to do with that institution's advertising. They do supply clearing services, lending services for marginable transactions, as well as back office support including cash management, account statements and transaction processing.

In portfolio theory, the alpha of a security or a portfolio is A) the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. B) the portfolio's average return divided by the security's beta. C) a measure of the variance in returns of a portfolio divided by its average return. D) the risk of the portfolio associated with the macroeconomic factors that affect all risky assets.

A) the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. Alpha is the difference in the expected return of the portfolio, given the portfolio's beta and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns.

Under FINRA rules, if a member wants to have the terms of a clearly erroneous trade adjusted, it must notify Nasdaq Market Operations A) within 30 minutes of the execution. B) before 4:00 pm ET on settlement date. C) before 4:00 pm ET on trade date. D) within 1 hour of the execution.

A) within 30 minutes of the execution. If a member wants to have a clearly erroneous trade adjusted or nullified, the member must make the request of Nasdaq Market Operations within 30 minutes of the execution.

What is the size of one LEAPS contract? A) More than 1,000 shares B) 100 shares C) 1,000 shares D) No standard LEAPS contract size

B) 100 shares Like a standard options contract, the size of a LEAPs contract is 100 shares.

If an investor practices value investing, which of the following stock types is he least likely to purchase? A) A stock with a low (P/E) ratio B) A stock with an above-average price-to-earnings (P/E) ratio C) A stock that is presently selling for two-thirds of net current assets D) A stock that has exhibited a high dividend yield in the past

B) A stock with an above-average price-to-earnings (P/E) ratio A growth investor looks for stocks with above-average (P/E) ratios. Conversely, a value investor focuses on stocks with low P/E ratios, a low price-to-book value, and historically high dividend yields.

Which of the following statements regarding a red herring is not true? A) Additional information may be added to a red herring at a later date. B) An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser. C) The final offering price does not appear in a red herring. D) A red herring is used to accept indications of interest from investors.

B) An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser.

Démodé Classic Investments (DCI) is planning a direct mail campaign to several thousand potential investors. The topic of the campaign deals with owning real estate through direct participation program limited partnerships. Under FINRA Rule 2210 on communications with the public, this is considered A) a retail communication and must be filed with FINRA at least 10 business days before first use or publication. B) a retail communication and must be filed with FINRA within 10 business days of first use or publication. C) a retail communication that needs approval, but not filing, by a designated DCI principal. D) correspondence and needs review, not approval, by a designated DCI principal.

B) a retail communication and must be filed with FINRA within 10 business days of first use or publication. A direct mail communication to more than 25 existing and/or potential clients within a 30-day period is a retail communication. Unless an exception applies, a designated principal of the firm must approve all retail communications. DPPs are part of a group of securities (other common examples are investment companies and CMOs) where filing with FINRA within 10 business days of first use or publication is the rule. LO 19.d

A firm underwriting of a municipal bond issue usually has a number of different broker-dealers involved. Those who earn the total takedown on each sale they make are performing in the role of A) the syndicate manager. B) a selling syndicate member. C) the issuer. D) a selling group member.

B) a selling syndicate member. Selling syndicate members have a commitment to sell the bonds allocated to them. On each bond the member sells, the total takedown (the takedown plus the additional takedown) is earned. Selling group members earn the concession. The syndicate manager earns the entire spread on any bonds it sells.

When a member firm sells municipal bonds to a customer out of its inventory, it must A) disclose the amount of commission on the customer's confirmation. B) indicate the amount of markup on the customer's confirmation. C) disclose its cost basis in the bond. D) indicate compliance with the 5% markup policy.

B) indicate the amount of markup on the customer's confirmation. In a principal transaction (out of its inventory), the markup must be disclosed on a confirmation, and because it is a principal transaction, commissions would not apply. The 5% markup policy does not cover exempt securities. The firm does not disclose what it paid for the bond. That price could be higher or lower than the current market and is not relevant to computing the markup on inventoried securities.

An investor has purchased a number of securities, including municipal bonds on margin. The margin interest paid to borrow the funds to purchase the municipal bonds is A) partially deductible. B) not deductible. C) only deductible if the investor has investment income. D) fully deductible.

B) not deductible. Interest received from municipal bonds is tax exempt, and therefore, the government does not allow margin interest paid to purchase them to be used as a deduction on one's income tax return.

Who signs the agreement among underwriters for a municipal bond issue? A) Managing underwriter and issuer B) Managing underwriter and trustee C) All members of the underwriting syndicate D) Managing underwriter and bond counsel

C) All members of the underwriting syndicate All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel, or trustee.

A customer seeks a significant long-term investment in the Ajax Fund, a growth-oriented mutual fund. To take advantage of breakpoints applicable to large investments, the customer should purchase A) Class B shares. B) Class D shares. C) Class A shares. D) Class C shares.

C) Class A shares. For initial purchases, breakpoints are only available if the customer purchases Class A shares, which are sold with a front-end load deducted from the initial investment. A substantial purchase can often reduce the sales charge to zero. Class B and Class C shares are sold with annual 12b-1 fees, as well as a contingent-deferred sales charge. Class D shares are sold with a level sales load plus a redemption fee.

One of your customers would like to purchase a government agency security for the UTMA account of her daughter. The daughter worked in construction over the summer and would like to use $1,275 of her savings for the purchase. Securities issued by which of these agencies could be purchased for this account? A) Federal Farm Credit System B) Federal Home Loan Mortgage Corporation C) Federal National Mortgage Association D) Student Loan Marketing Association

C) Federal National Mortgage Association Of this group, the only agency that would be able to sell $1,275 of securities is Fannie Mae. Their securities are available with a minimum denomination of $1,000 and then increments of $1. FHLMC also has the $1,000 initial minimum, but with $1,000 increments. The same numbers apply to the FCS, and Sallie Mae's minimum is $10,000. Another agency that would have met the investor's need is GNMA.

Your broker-dealer acts as a prime broker for ABC Fund. In this arrangement, your broker-dealer is likely providing which of the following services? I Execution of all transactions for the fund portfolio II Clearing services III Lending for trades done on margin IV Ensuring that all exchange trading rules are complied with

C) II and III The prime broker would supply clearing services and lending services for a marginable transaction, as well as back-office support such as cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker-dealers.

Municipal securities issued by which of the following are triple tax exempt? A) Public authorities B) Hawaii C) U.S. territories D) New York City

C) U.S. territories

When an institution wishes to take a large position in a municipal bond issue but does not want its activities to be well known, it will generally make use of A) the bond buyers visible supply. B) EMMA. C) a municipal securities broker's broker. D) social media to find the bonds.

C) a municipal securities broker's broker. The role of a municipal securities broker's broker is to act as a confidential conduit between municipal dealers with bonds to sell and potential buyers. Anonymity is preserved.

All of the following are minimum requirements for listing on the NYSE except A) market value of publicly held shares. B) number of shareholders. C) earnings per share. D) number of publicly held shares.

C) earnings per share. While the numerical values are not tested, it is important to know that there is no minimum earnings per share requirement. However, there is a minimum earnings requirement.

When opening a new retail account or updating account information for a specified adult, FINRA Rule 2165 urges member firms to obtain the name and contact information of a "trusted contact person." If the client supplies that information, the person A) has authority to request duplicate confirmations and account statements from the client's account. B) has authority to withdraw funds or securities from the client's account. C) may help the member firm respond to possible financial exploitation or fraud in the client's account. D) has authority to submit buy and sell orders for the client's account.

C) may help the member firm respond to possible financial exploitation or fraud in the client's account. The primary reason behind Rule 2165 is to try to prevent senior exploitation. By obtaining the name and contact information of a trusted contact person (who must be at least 18 years of age), the firm has someone to reach out to when red flags appear. It is important to understand that the naming of this person does not convey any rights over the account. This is not a power of attorney.

A municipal revenue issue's flow of funds statement is contained in A) the agreement among underwriters. B) the notice of sale. C) the bond contract. D) the legal opinion.

C) the bond contract. The bond contract describes the nature of the contract and the issuers' duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance.

A customer buys an Oct 79.50 foreign currency call on the Australian dollar. The Australian dollar spot price is 89.73, and the option contract size is AUD$10,000. If the option contract is offered at 11, what was the customer's total premium paid for the contract? A) $8,973 B) $11,000 C) $10,000 D) $1,100

D) $1,100 Currency options are quoted in U.S. cents per dollar, and one point equals $100. A quote of 11.00 is equal to $1,100 per contract.

Which of the following statements regarding a bond ladder strategy is correct? A) A bond ladder strategy works best when interest rates are stable. B) A bond ladder strategy involves the purchase of very long-term and very short-term bonds. C) A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds. D) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

D) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. A bond ladder strategy is a relatively easy way to immunize (protect) a portfolio against interest rate risk. By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in another. The laddered portfolio will generally provide higher, not lower yields than a portfolio consisting entirely of short-term bonds. Buying bonds with very short maturities and bonds with long maturities is the concept behind the barbell strategy.

Which of the following would give a bearish sign to a technical analyst? A) An increase in the short interest B) A stock dropping below its resistance level C) A head and shoulders bottom pattern D) An increase in odd-lot purchases

D) An increase in odd-lot purchases Odd lots (less than 100 shares) are bought and sold almost exclusively by unsophisticated investors. Technicians believe them to always be on the wrong side of the market. When the odd lotters are buying, it is time to sell (bearish). High short interest is bullish. A head and shoulders bottom indicates that the stock has bottomed and is on its way back up (bullish). It would be bearish if a stock's price fell below the support level.

Which of the different sharing arrangements for limited partnerships between the general partners (GPs) and the limited partners (LPs) is generally considered the most common? A) Overriding royalty interest B) Carried interest C) Net operating profits interest D) Functional allocation

D) Functional allocation While both LPs and GPs share equally in the revenues with a functional allocation arrangement, it is most commonly used because it gives the best tax benefits to each. The LPs receive the immediate tax write-offs from the intangible drilling costs, whereas the GPs receive continued write-offs from the tangible costs over the course of several years.

A firm may assign option exercises using which of the following methods? First-in, first-out (FIFO) Last-in, first-out (LIFO) Random assignment Based on holders of the smallest positions

D) I and III A firm may assign an exercise either randomly or using the FIFO accounting method. LIFO is not permitted, nor is assigning by position size, smallest, or largest.

An investor is buying stock through a private placement. Under the Securities Act of 1933, which of the following statements is true? A) The investor must notify the SEC that they are buying private placement securities. B) The investor will receive a letter stating their ownership. C) The stock must first be registered with the SEC. D) The stock need not be registered with the SEC.

D) The stock need not be registered with the SEC. Private placements are exempt transactions under Regulation D of the Securities Act of 1933 and are therefore exempt from registration. Investors in a private placement of stock are entitled to receive a stock certificate as with any stock purchase. However, the certificate may bear a legend indicating that it cannot be transferred without registration or exemption.

Which of the following is limited in the case of a limited tax municipal bond? A) The number of taxpayers B) The number of buyers C) The number of bonds issued D) The type of tax that can be used to service the debt

D) The type of tax that can be used to service the debt A general obligation (GO) bond may be backed by a specific tax. For example, a limited tax GO may be serviced only from sales tax revenue, not income tax revenue. As the source of debt service is limited (it is not backed by the full taxing authority of the issuer), these bonds are sold with higher yields than conventional GOs.

Ginnie Mae pass-throughs will pay back both principal and interest A) quarterly. B) annually. C) semiannually. D) monthly.

D) monthly.

If a company issues $10 million in par value convertible debentures, all of the following balance sheet items will be affected except A) working capital. B) liabilities. C) assets. D) net worth

D) net worth. Net worth is not affected by the issuance of long-term debt because it does not represent ownership. Assets will be affected (increased) by the issuance of long-term bonds. Liabilities will be affected (increased) by the amount of the issuance. Working capital will also increase. How does the working capital increase if the net worth does not? Because this company now has $10 million more in cash, and the liability is the debenture that is included in long-term debt, not current liabilities.