1-20 Qbank wrong answers

A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is true? A) It is permitted if provided for in the underlying documentation. B) It is permitted if the fiduciary observes the prudent investor rule. C) It is permitted if the fiduciary shares in the profits or losses. D) It is not permitted

A) It is permitted if provided for in the underlying documentation.

Under what circumstances will a dilution of equity occur? A) The conversion of convertible bonds into common stocks B) Stock split C) Issue of mortgage bonds to replace debentures D) Stock dividend

A) The conversion of convertible bonds into common stocks Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued, and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders.

If a stock undergoes a 1-for-5 reverse split, which of the following increases? Market price per share Number of shares outstanding Earnings per share Market capitalization of the company A) I and III B) III and IV C) II and III D) I and II

A) I and III After a reverse split, there will be fewer shares outstanding. As a result, market price and earnings per share will increase. Overall, the market capitalization of the company will not change.

Which of the following statements regarding American depositary receipts (ADRs) are true? They are issued by large domestic commercial banks. They are issued by foreign banks. They facilitate U.S. trading in foreign securities. They facilitate a foreign investor who wants to trade U.S. securities. A) I and III B) II and III C) I and IV D) II and IV

A) I and III ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities.

Characteristics common to penny stocks would include which of the following? Market price less than $5 per share Market price greater than or equal to $5 per share Nasdaq over-the-counter (OTC) stock Non-Nasdaq OTC stock A) I and IV B) II and IV C) I and III D) II and III

A) I and IV Penny stocks are generally defined as those with a market price below $5 per share that are not traded on any exchange or Nasdaq.

A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order? A) It is good only for the day entered. B) It requires written discretionary authorization. C) It cannot be accepted without a price being specified. D) It may be executed at any price or any time the broker-dealer feels is best.

A) It is good only for the day entered.

In active trading, a bond of standard size rises in price from 98 5/8 to 101¾. This represents a dollar change of A) $3.125. B) $312.50. C) $0.3125. D) $31.25.

D) $31.25. Method #1 1) The increase is 3 1/8 points (101 ¾ minus 98 5/8 = 101 6/8 minus 98 5/8 = 3 1/8 2) 3 1/8 = $30 (3 times $10 per point) + $1.25 which equals $31.25 Method #2 1) 101 3/4 = 101 x $10 = $1,010 + 3/4 of $10 = $7.50, total price is $1,017.50. 2) 98 5/8 = 98 x $10 = $980 + 5/8 of $10 = $6.25. total price is $986.25. 3) The difference between the two prices is $1,017.50 minus $986.25 which = $31.25.

Designating a beneficiary with a transfer on death (TOD) provision may be done in which of the following accounts? A) Individual account only B) Individual account and joint tenants in common (TIC) C) Individual account and joint tenants with right of survivorship (JTWROS) D) Individual account, joint tenants with right of survivorship (JTWROS), and joint tenants in common (TIC)

C) Individual account and joint tenants with right of survivorship (JTWROS) The TOD designation is limited to the individual account and the JTWROS account.

The DERP Corporation has a rights offering. The common stock is currently selling at $45.50. DERP is issuing one new share of stock at $40 per share for each 10 shares owned. What is the theoretical value of one right when the stock is traded ex-rights? A) $0.55 B) $0.40 C) $0.45 D) $0.50

A) $0.55 The formula for the theoretical value of a right when it is ex-rights (the buyer doesn't get the rights) is (M ‒ S) ÷ N where M = market price of the stock, S = the subscription price, and N = number of rights needed. Plug in the numbers and you have ($45.50 ‒ $40) divided by 10. That is $5.50 divided by 10 or $0.55 each

A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be A) $25.25. B) $43.91. C) $40.00. D) $25.00.

A) $25.25. To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1,010 / 40 = $25.25).

A convertible bond callable at 101 is trading at 105. The bond is a 4% bond convertible at $25. The common stock is trading at $27. If an investor bought the bond and converted, her profit would be A) $30. B) $75. C) $20. D) $40.

A) $30. First, calculate the number of shares each bond will convert to: $1,000 (par) divided by $25 per share equals 40 shares per bond. With market value at 105, each bond costs $1,050. What is the stock parity price? $1,050 divided by 40 shares equals $26.25 per share. Current market value of the stock minus stock parity price equals profit (or loss). $27.00 − $26.25 = $0.75 per share × 40 shares = $30.

Nickelplate Manufacturing Corporation (NMC) is capitalized with 1 million shares of a 6% $50 par callable preferred stock and 10 million shares of $1 par common stock. Your customer's required rate of return on fixed income investments is 8%. The NMC preferred stock would be an appropriate addition to this customer's portfolio only if the stock was not priced in excess of A) $37.50. B) $75.00. C) $66.66. D) $40.00.

A) $37.50. How does a 6% preferred stock return 8%? Remember the inverse relationship between interest rates and fixed income security prices. As one goes up, the other goes down. An increased return results from a decreased price. The math is basic algebra. We know the annual dividend is $3 per share (6% of $50 = $3); that is fixed. What number results in a payment of $3 providing an 8% return? Divide 3.00 by $8 and the answer is $37.50. You could also do this question by working backwards. Multiply each of the choices by 8% and the one where the product is $3 is correct.

If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares? A) 100 B) 500 C) 400 D) 300

A) 100 The investor will receive an additional 100 shares from a 3-for-2 stock split. To calculate the additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares × 3/2 = 300 shares). Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares.

If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold for A) 15 business days. B) one month. C) 15 calendar days. D) until the need for the hold ends.

A) 15 business days.

Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into half a share of common. The preferred stock is selling at $17.50, and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion? A) 2,500,000 B) 3,000,000 C) 2,000,000 D) 500,000

A) 2,500,000 One million shares of preferred, each converted to half a share of common, is 500,000 common shares, and 500,000 shares after conversion, added to 2 million shares of common previously outstanding, equals 2.5 million common shares.

Which of the following oral orders can be accepted from a customer without additional documentation? A) Buy 100 shares of ABC when the price is right B) Buy 200 shares of computer stock C) Increase my position in ABC D) Buy $20,000 of quality bank stocks

A) Buy 100 shares of ABC when the price is right Prices and time of execution do not require discretionary authority.

Which of the following debt instruments would likely be suitable for sophisticated investors only? A) Equity-linked notes B) First mortgage bonds C) Debentures D) Jumbo CDs

A) Equity-linked notes Despite the misleading name, ELNs are debt instruments. When traded on an exchange, they are exchange-traded notes (ETNs). In either case, these are considered alternative products with unique risks, and therefore, not suitable for most investors. Although debentures are corporate debt without any pledged collateral, some of the financially strongest companies in the country issue them and receive high ratings. Even though Jumbo CDs require a minimum of $100,000, it does not require any sophistication to understand the product.

One of your customers owns 100 shares of GTS common stock. The purchase was made two years ago at a price of $51 per share. GTS has recently declared a 3:2 stock split. At the customer's request, as soon as the new shares are in the account, you sell them and $2,000 from the proceeds of the sale is credited to the customer's account. Based on this information, the tax impact of this transaction is A) a long-term capital gain of $300. B) a long-term capital loss of $1,333 and a short-term capital loss of $667. C) a long-term capital loss of $1,400. D) a short-term capital gain of $300.

A) a long-term capital gain of $300. Immediately after the stock split, the total investment of the initial position remains unchanged at $5,100 (100 shares at $51 per share). After the stock split, the customer owns 150 shares (3/2 times 100 = 150 shares). Therefore, the adjusted cost basis per share is $34 ($5,100 divided by 150 shares). Those 50 shares were sold for $2,000 and have a cost basis of $1,700 ($34 times 50). That is a profit of $300. Alternatively, you could say that 50 shares sold for $2,000 represents a selling price of $40 per share ($2,000 divided by 50 shares), which is a $6 per-share profit ($40 minus the $34 cost basis). Fifty shares times $6 equals a profit of $300. he gain is long-term because the holding period of securities received through a stock split (or stock dividend) is that of the original purchase.

An investor purchases a newly issued convertible bond at par. The bond is convertible at $40. Three years later, the underlying common stock is trading at $50 per share. If the investor sells the bond at a $50 premium over the parity price, there is A) a long-term capital gain of $300. B) a long-term capital gain of $200. C) a long-term capital gain of $1,050. D) a long-term capital gain of $10 per share.

A) a long-term capital gain of $300. This question involves several steps. The first is to determine the conversion ratio in shares. A bond convertible at $40 per share has a share conversion rate of 25 shares ($1,000 ÷ $40). The second step is to compute the parity price. That is, what are those 25 shares worth? Multiply 25 shares times $50 per share and that equals $1,250. When the bondholder sells the bonds at parity plus a $50 premium, $1,300 is received. The $300 profit over the $1,000 initial cost is a long-term capital gain. An alternative that might be easier for some is to look at the appreciation of the stock. It is $10 per share higher than the conversion price of $40. That represents an increase of 25% (10 ÷ 40). If the bond is at parity with the stock, its price must be 25% higher and that brings us again to the $1,250 parity price. Add the $50 premium to get to $1,300, $300 above the initial cost.

When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include A) a tabular comparison of the nature and amount of the fees charged by each fund. B) a detailed explanation of the reason for the change. C) a statement that the change will not take place until at least 45 days after the communication was sent. D) a description of the objectives of the new fund and its prospectus.

A) a tabular comparison of the nature and amount of the fees charged by each fund.

Synapse Communication Corporation (SCC) is growing. To finance the expansion, the company has a $100 million debenture offering. Attached to the offering are five-year warrants to purchase SCC common shares. Each warrant allows for the purchase of one SCC share at a price of $53 per share. Three years after the issue date, SCC stock is trading at $63 per share. Each warrant has A) an intrinsic value of $10 per warrant. B) an intrinsic value of $5 per warrant. C) no intrinsic value, only time value. D) an intrinsic value of $20 per warrant.

A) an intrinsic value of $10 per warrant. A warrant has intrinsic value when the exercise price is lower than the stock's current market price. In this question, each warrant allows the holder to purchase one share of a $63 stock for $53 per share. That is a $10 per share difference. Therefore, intrinsically, the warrant is worth $10. With two years to go, it also has time value, but the question is not dealing with that.

One of your customers owns 10 HBH Creations 4.5% convertible callable debentures. The conversion price into HBH common stock is $40. With the current market price of the HBH Creations stock at $44, the company publishes a notice that all of the debentures will be called in thirty days at a price of 104. When the customer calls for your advice, you would probably recommend A) exercising the conversion privilege. B) selling the stock. C) selling the debenture. D) accepting the call.

A) exercising the conversion privilege. Generally, a corporation exercises the call privilege when the call price is below the parity price With a current market price of the stock at $44 per share, the parity price of the debenture is 110 ($1,100). The effect of this call is that it, in essence, forces the investors to convert, and the issuer never has to pay off the debt. Let's take a look at the math here. With a conversion price of $40, a debt security with a par value of $1,000 is convertible into 25 shares ($1,000 ÷ 40). If the stock is currently selling at $44 per share and the investor could convert into 25 shares, it makes the conversion worth $1,100 (25 shares times $44 = $1,100). In our question, the call price is 104 ($1,040) so the question becomes, "What is a better deal for your customer: exercising the conversion privilege that gives the customer stock with a value of $1,100 or accepting the call worth $1,040?" Why not just sell the debentures? Because once the call at 104 has been issued, the price of the debentures will decline to approximately that level. Why not sell the stock? The investor doesn't own any stock until conversion, so there is nothing yet to sell.

When compared to statutory voting, cumulative voting gives an advantage to A) minority stockholders. B) participating preferred stockholders. C) majority stockholders. D) management rather than the board of directors.

A) minority stockholders. Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.

When an individual associated with another FINRA member firm wishes to open up an investment account at another member firm, the executing member must A) provide duplicate statements and confirmations if requested by the employer member. B) receive permission from the employer member before the initial transaction may take place. C) obtain a copy of the individual's Form U4 to verify registration status. D) notify the employer member of the associated person's intent to open the account.

A) provide duplicate statements and confirmations if requested by the employer member. FINRA Rule 3210 requires that an executing member shall, upon written request by an employer member, transmit duplicate copies of confirmations and statements. The associated person is the one who must notify the employer member of the intent to open the account and receive written consent to do so. Furthermore, the associated person is required to give written notice to the executing member that the individual is associated with the employer member.

With the advent of the horseless carriage (a.k.a. the automobile), the Acme Buggy Whip Corporation's revenues fell to the point where it could no longer cover expenses. This led to an involuntary bankruptcy. The priority of payout was A) senior notes, general creditors, preferred stock, common stock. B) general creditors, senior notes, preferred stock, common stock. C) senior notes, preferred stock, common stock, general creditors. D) common stock, preferred stock, general creditors, senior notes.

A) senior notes, general creditors, preferred stock, common stock. Senior debt refers to obligations that have priority in the event of default. It parallels the use of senior when comparing preferred stock to common stock, the most junior of all securities.

When opening a new account for an individual investor, FINRA asks its member to make a reasonable effort to obtain certain information about the account. Included information would be all of the following except A) the name(s) of the customer's dependents. B) the customer's tax identification or Social Security number. C) the occupation of the customer and name and address of the employer. D) whether the customer is an associated person of another member.

A) the name(s) of the customer's dependents.

An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share of this position after the company pays a 100% stock dividend? A) $50 B) $100 C) $400 D) $200

B) $100 The total value of the initial position is unchanged, remaining at $40,000 (200 times $200). After the stock dividend, the investor owns 400 shares (200 times 100% = 200 + 200 = 400) Therefore, the adjusted cost basis is $100.00 per share ($40,000 divided by 400 = $100). Perhaps you recognized that a 100% stock dividend has the same effect as a 2:1 split. That is, the stock's cost basis is cut in half.

A convertible corporate bond with a conversion price of $20 is trading at 115. The parity price of the common stock is A) $20. B) $23. C) $26. D) $17.

B) $23. A conversion price of $20 means the conversion ratio is 50 (i.e., each bond can be converted into 50 shares of common stock). $1,150 / 50 = $23 parity price.

An investor purchased 100 shares of ABC common stock valued at $6,000. What is the adjusted cost basis per share of this position after the company pays a 20% stock dividend? A) $60.00 B) $50.00 C) $72.00 D) $48.00

B) $50.00 The total value of the initial position is unchanged, remaining at $6,000. After the stock dividend, the investor owns 120 shares (100 × 20% = 20 + 100 = 120). Therefore, the adjusted cost basis is $50 per share ($6,000 divided by 120 = $50). It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same.

A bond convertible at $50 is selling at 105% of parity, while the common stock has a current market value of $45. What is the market value of the bond? A) $900 B) $945 C) $1,000 D) $1,045

B) $945 When a bond is convertible at $50, it means the holder can exchange each $1,000 par value bond for the company's common stock at a rate of $50 per share. Dividing $1,000 (always use the par value, not the market value) by $50 results in a conversion rate of 20 shares per bond. With the bond convertible into 20 shares and the market price of each share currently $45, the parity price, the price at which the value of the stock and the bond are the same, is $900, (20 x $45). The question tells us that the bond is selling for 105% of the parity price. That would be $900 x 105% = $945. **An alternative method is to recognize that the stock is selling for 10% below its conversion price ($45 is $5 less than $50 and $5 ÷ $50 = 10%). That means the parity price of the bond must be 10% below the par value, or $900 (which is 10% less than $1,000). Once you have the $900, multiply by 105% to arrive at the correct answer of $945.

The following is taken from the S&P Bond Guide: FLB Zr 37 87 87½. What is the coupon rate on this bond? A) 8.70% B) 0% C) 0.37% D) 8.75%

B) 0% FLB is the issuer, Zr means zero coupon, 37 indicates the year of maturity (2037), 87 is the bid price ($870), and 87½ is the asked price ($875).

Your client owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? A) 125 shares at $18.75 B) 125 shares at $20 C) 100 shares at $31.25 D) 100 shares at $25

B) 125 shares at $20 Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged before and after the adjustment: 125 shares × $20 = $2,500, and 100 shares × $25 = $2,500.

ABC has 1 million shares of common stock outstanding. Mr. Chen owns 100,000 shares of ABC common stock. If ABC issues an additional 500,000 shares, and assuming ABC's charter calls for preemptive rights, Chen will receive enough rights to purchase A) 20,000 additional shares. B) 50,000 additional shares. C) 15,000 additional shares. D) 10,000 additional shares.

B) 50,000 additional shares. Mr. Chen has a 10% ownership position in ABC (100,000 divided by 1,000,000). Therefore, if an additional 500,000 shares are issued, Mr. Chen has a preemptive right to maintain his 10% position. Ten percent of 500,000 = 50,000 additional shares.

Which of the following callable municipal bonds trading on a 7% basis is most likely to be called? A) 6.5% coupon, callable at 105 in 2030 B) 7.5% coupon, callable at 100 in 2030 C) 7.5% coupon, callable at 105 in 2030 D) 6.5% coupon, callable at 100 in 2030

B) 7.5% coupon, callable at 100 in 2030 An issuer will call the higher coupon bonds before calling the lower coupon bonds. Of the two bonds with coupons of 7.5%, the one with the lower call price will likely be called first.

For which of the following business structures is the income taxed to the business? A) A limited partnership B) A C corporation C) A general partnership D) An S corporation

B) A C corporation Partnerships, limited or general, and S corporations do not pay income tax. Any income earned by the business flows through to the owners. On the other hand, C corporations are taxable entities and must pay tax on their income before they can distribute dividends to shareholders.

Many businesses open brokerage accounts to invest surplus funds. For which of the following business forms would suitability information on the owners not be required? A) An S corporation B) A C corporation C) An LLC D) A sole proprietorship

B) A C corporation A C corporation is the only business form where the tax and other consequences of the account do not accrue to the individual owners. Can you imagine a well-known publicly traded corporation with several million shareholders opening an account where the registered representative would have to obtain suitability information on all of them? Even when it is a small business, because the C corporation is its own taxable entity, the suitability requirements are not as critical as with the pass-through businesses (partnerships, LLCs, and S corporations). Of course, the sole proprietorship is the individual, so that is where the suitability is focused.

An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle? The investor is 65 years old and needs the reliability of current income. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible. A) I and II B) II and III C) III and IV D) I and IV

B) II and III Zero-coupon bonds maturing in 18 years would assure the 45-year-old of the face value at age 63. Being in an IRA, there would be no current taxation, and upon maturity, if desired, the funds could be distributed without the 10% penalty. Zero-coupon bonds are one way to guarantee funds for college education. However, with no current income, they would not be suitable for the 65-year-old and would not offer any tax shelter to the 20-year-old.

An investor owns 100 shares of the 4% $80 par convertible, callable, cumulative preferred stock issued by HBH Creations. With a conversion price of $20 and a current market price of $84, HBH issues a call of all of the outstanding preferred shares at $82. If the HBH Creations common stock is currently selling at $18 per share, what is likely the wisest choice for the investor? A) Sell the preferred stock B) Accept the call at $82 C) Hold on to the preferred stock D) Convert the preferred into the common at the stated conversion rate

B) Accept the call at $82 Although issuers generally exercise the call privilege when the common stock's price is above the conversion price, there are cases when the call is exercised with the hope of eliminating some of the preferred shares with their preferred dividend payout. Let's go through the math of this question. With a par value of $80 and a conversion price of $20, each share of the preferred stock is convertible into 4 shares of the HBH Creations common stock. If the investor converts, those 4 shares are currently worth $18 each or a total of $72 for each share of preferred converted That being the case, the investor's decision is, "Do I convert and have stock worth $7,200 (remember, there are 100 shares of the preferred, each convertible into 4 shares of the common), or do I accept the call at $82 per share of preferred totaling $8,200? Why not sell the preferred stock at $84? Because the moment the call is announced, the price of the preferred will fall. Holding on to the preferred stock doesn't make sense because after the call date, the preferred will no longer receive dividends.

Which of the following would least likely occur when a corporation engaged in a rights offering? A) The number of outstanding shares would increase. B) After successful completion of the offering, the market price would rise slightly. C) The corporation would use a standby underwriter. D) After successful completion of the offering, the market price would decline slightly.

B) After successful completion of the offering, the market price would rise slightly. Successful completion of a rights offering generally results in a slight decline in the market price of the stock. This is because the subscribers were able to purchase at a price below the current market. This would have a small dilutive effect, causing a slight reduction in the market price. The rights offering is of additional shares, so the number outstanding would increase. Most corporations use a standby underwriter who will buy any shares that were not exercised.

Reggie owns a convertible bond that converts into 20 shares of common stock. The current market value of the bond was 118½ at the close on Friday, April 1. A 30-day call is announced before the opening on Monday, April 4, at a price of 102. The stock is trading at $57.75. What should Reggie do? A) Hold the bond to maturity B) Convert the bond into the stock C) Redeem the bond at the call price D) Sell the bond

B) Convert the bond into the stock Reggie will not be allowed to hold the bond to maturity because it is being called. The real question is whether he should sell the bond, allow it to be called, or convert it to the underlying stock. Now that the call has been announced, the market value of the bond will fall to meet the call price. This occurs as a result of declining demand. (Who wants to buy a bond that is about to be called at a lower price?) Thus, redeeming the bond at the call price and selling the bond would both yield the same results: $1,000 times 102% equals $1,020. If he converts the bond, he will get the following results: 20 shares times $57.75 equals $1,155. Therefore, it makes the most sense to convert the bond.

A retiree is paid an annual amount equal to 30% of the average of his last five years' salary. Which of the following retirement plans offers this type of payment? A) Deferred compensation B) Defined benefit C) Defined contribution D) Profit-sharing

B) Defined benefit A defined benefit retirement plan establishes, in advance, the payout to be received by the retiree. The formula is based on earnings and years of service.

Dale Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. Wells is looking for favorable tax treatment of earnings and losses. Wells also wants to limit the number of investors but is willing to share control of the enterprise with others to attract them. What business form would you advise? A) C corporation B) General partnership C) S corporation D) Limited partnership

B) General partnership

Which of the following activities are disallowed under FINRA rules? Opening an account for a 16-year-old individual Accepting a sale in a joint account from one of the owners and having the check payable in the name of that individual Accepting a sale order from the husband only in a joint account owned by both husband and wife Requiring written discretionary authorization before accepting orders for a discretionary account A) I and IV B) I and II C) III and IV D) II and III

B) I and II The question is asking for the nonallowable practices. We cannot open an account for a minor, nor may we make a check payable to only one of the parties in a joint account.

Which of the following are characteristics of commercial paper? It represents a loan by the holder to the issuer. It is a certificate of ownership in the corporation. It is commonly issued to raise working capital for a corporation. It is junior in preference to convertible preferred stock. A) II and III B) I and III C) I and IV D) II and IV

B) I and III Commercial paper instruments are debt securities; they represent loans to the issuing corporation by the holder. They are commonly issued to raise working capital and, as debt obligation, are senior in preference to preferred stock in claims against an issuer.

Which of the following statements regarding qualified retirement plans are true? Contributions are made with pretax dollars. Contributions are made with after-tax dollars. Distributions are 100% taxable. Distributions are taxable only to the extent of earnings. A) II and IV B) I and III C) I and IV D) II and III

B) I and III With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.

An investor wants to maximize income using debt securities. Which of the following lists rank securities from the least suitable to the most suitable recommendation if income is the investment objective? A) Treasury bills, convertible bond, income bond B) Income bond, convertible bond, nonconvertible bond C) Nonconvertible bond, convertible bond, income bond D) Convertible bond, income bond, nonconvertible bond

B) Income bond, convertible bond, nonconvertible bond The income (or adjustment) bond is the least suitable because it is issued by companies coming out of bankruptcy with interest payable only if the money is available. Therefore, it is not suitable given the objective. A convertible bond has a lower coupon than a nonconvertible bond because of the convertibility feature. Therefore, if seeking to maximize income, the corporate bond would be the most suitable of the three choices (from least to most: income bond, convertible bond, and nonconvertible bond).

A customer purchased 10 ABC 9s of 2045 convertible debentures at 99. The debentures are callable at 101. The conversion ratio is 40. Some time later, the debentures are called while the common is trading at $24 and the debenture is trading at 98. Which of the following options would be most beneficial to the customer? A) Wait for a better offer from the corporation B) Tender the bonds to the corporation C) Sell the bonds D) Convert the bonds and sell the common stock

B) Tender the bonds to the corporation First of all, recognize that the investor purchased 10 of the debentures. They have a coupon of 9% and mature in 2045. None of that is relevant to answering the question, but we want to be sure you understand the terminology.The option most beneficial to the investor is tendering the debentures to the corporation for $10,100 (10 times $1,010). If the debentures were sold on the market, the investor would receive $9,800 (10 times $980). If the debentures were converted into common, the investor would receive 400 common shares (40 shares per debenture times 10) that could be sold for their current price of $24, for a total of $9,600.

A tombstone ad for a new bond issue announces that warrants to purchase shares of the issuer's common stock at $75 per share are attached to the bonds. The common stock is currently traded at $45 per share and the warrants expire in five years. What is the most likely reason the issuer attached the warrants to the bonds? A) To make the bonds convertible into the issuer's common stock B) To improve the marketability of the bond issue C) To increase the dilution of the current shareholders D) To decrease the dilution of the current shareholders

B) To improve the marketability of the bond issue Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues. Dilution may occur at the time the warrants are exercised (if ever), but this would not be a reason for their issuance. A warrant has nothing to do with the bond's convertibility into the underlying common stock.

The over-the-counter (OTC) market is A) all of these. B) a negotiated market. C) the first market. D) an auction market.

B) a negotiated market. The OTC market is a negotiated market. Registered market makers compete among themselves to post the best bid and ask prices.

If three individuals open up a joint account with your firm, and one of the parties to the account possesses written authorization from the other parties granting her authority to make all trading decisions, the new account form must contain information on A) the individual granted trading authority. B) all three individuals. C) any two of the three individuals. D) the individual with the highest net worth.

B) all three individuals. Information is required for all three individuals because they all have ownership in the account.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding except A) profit-sharing plans. B) deferred compensation plans. C) corporate pension plans. D) 401(k) plans.

B) deferred compensation plans. Deferred compensation plans are not qualified plans and may be discriminatory. 401(k), profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

A bond investor who is looking for capital gains should invest in bonds when interest rates are A) low and expected to rise. B) high and expected to decline. C) low and expected to decline. D) high and expected to rise.

B) high and expected to decline. This is about the inverse relationship between interest rates and bond prices. As interest rates rise, bond prices fall. Conversely, when interest rates decline, bond prices increase. If an investor buys bonds when the current interest rates are high, a future decline in those interest rates will cause the price of the bonds to increase.

A corporation must have stockholder approval to A) declare a cash dividend. B) issue convertible bonds. C) repurchase 100,000 shares of stock for its Treasury. D) declare a 15% stock dividend.

B) issue convertible bonds. Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholders' proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its Treasury, declaration of a stock dividend, and declaration of a cash dividend.

DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be A) $50. B) lower than $50. C) the stock's current market price. D) higher than $50.

B) lower than $50. With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This means the bondholder must be able to convert it to more shares, which requires a lower conversion price.

A corporation has $25 million of 5% bonds outstanding. The bonds are callable at 102. Current market interest rates are 6%. If the company would like to retire $10 million of the debt, it might be smart to A) exercise the call provision for $10 million face amount of the bonds. B) make a tender offer to purchase $10 million face amount of the bonds. C) issue $10 million of new bonds at current rates and use the proceeds to call in outstanding ones. D) issue $10 million of treasury stock and use the proceeds to retire the bonds.

B) make a tender offer to purchase $10 million face amount of the bonds. When current market interest rates are 6%, bonds with a 5% coupon are selling at a discount. That means the company could make a public offer to buy the bonds back at a price somewhat below par value. In simple terms, they could retire $10 million of debt for less than $10 million. It would make no sense to call the bonds at 102 ($1,020) when they can be purchased for less than $1,000 each in the open market. Issuing new bonds to retire old ones, a practice known as refunding, is done when interest rates have fallen. In this question, interest rates have gone up making that plan incorrect.

A customer asks her registered representative to exercise discretion over her account. To do so, the representative must do each of the following except A) obtain evidence of written acceptance of the account by a registered principal of the firm. B) obtain approval from FINRA. C) obtain written authorization from the customer. D) have a principal initial each order promptly, which may be before or after execution.

B) obtain approval from FINRA. The requirements for a discretionary account include a written authorization from the customer, a written acceptance by a principal of the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation. No approval from FINRA is required.

An investment banker purchasing what is left unsold from a rights offering is engaging in A) firm commitment underwriting. B) standby underwriting. C) all or none underwriting. D) preemptive rights underwriting.

B) standby underwriting. In many cases, when a corporation is issuing new shares, existing shareholders receive preemptive or stock rights to buy these new shares to maintain their current proportionate ownership. In the event some of the rights are not used, the standby underwriter agrees to purchase those unsubscribed for shares.

Due to a sudden drop in earnings, the board of directors of Amalgamated Metal Industries (AMI) has voted to suspend all dividend payments this year. This would have the least effect on holders of AMI's A) senior claim preferred stock. B) subordinated debentures. C) callable preferred stock. D) cumulative preferred stock

B) subordinated debentures. Regardless of the level of seniority of a preferred stock, it comes behind any debt security. More importantly, interest on a debenture, subordinated or not, is a contractual obligation. Unlike the dividends on stock, the decision to pay or not to pay interest is not an optional one. Failure to pay interest on a debt security can lead to foreclosure and bankruptcy proceedings.

An investor purchases a newly issued convertible bond at par. The bond is convertible at $25. Three years later, the underlying common stock is trading at $33 per share. If the investor sells the bond at the parity price, A) the investor has no gain and no loss. B) there is a long-term capital gain of $320. C) there is a long-term capital gain of $8 per share. D) there is a long-term capital loss of $175.

B) there is a long-term capital gain of $320. This question involves several steps. The first is to determine the conversion ratio in shares. A bond convertible at $25 per share has a share conversion rate of 40 shares ($1,000 ÷ $25) The second step is to compute the parity price. That is, what are those 40 shares worth? Multiply 40 shares by $33 per share and that equals $1,320. When the bondholder sells the bonds at parity, that $1,320 is received. The $320 profit over the $1,000 initial cost is a long-term capital gain. -------- An alternative that might be easier for some is to look at the appreciation of the stock. It is $8 per share higher than the conversion price of $25. That represents an increase of 32% (8 ÷ 25) If the bond is at parity with the stock, its price must be 32% higher and that brings us again to the $1,320 price.

Common stock that has no voting power, no rights to receive dividends, that has been authorized and issued but is not outstanding is known as A) Class B common shares. B) treasury stock. C) unissued stock. D) subordinated shares.

B) treasury stock. This is the definition of treasury stock.

KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an antidilution feature. If KLM declares a 10% stock dividend, the new conversion price will be A) $50.00. B) $45.45. C) $22.73. D) $22.50.

C) $22.73. Before the stock dividend, an investor would have received 40 shares of stock for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10%(of 40) = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price. or 1,000/25= 40 shares 10% divedend would mean 1010 1010/40= 22.73

Which of the following bonds is most affected by interest rate risk? A) 7.3s of '37 B) 7.5s of '39 C) 7.6s of '45 D) 7.8s of '42

C) 7.6s of '45 To begin with, let's be sure you understand the nomenclature used here. Each of the choices has two numbers. The first is the coupon rate of the bond and the second is the year the bond matures. For example, the 7.3s of '37 pay interest at a rate of 7.3% of the $1,000 par value per year and mature in 2037. The s is just to separate the two numbers. Interest rate risk is the loss in value due to a rise in interest rates. Because there is little difference in coupon rates, the bond with the longest maturity (highest duration) will experience the greatest fall in a rising interest rate market.

With a bearish outlook on the market, an investor would like to purchase something that will generate income now during current bearish conditions but would also be able to take advantage of capital appreciation should market sentiment turn bullish. Which of the following would be a suitable purchase recommendation that puts the investor in a position to do both? A) Cumulative preferred stocks B) Nonconvertible bonds C) Convertible bonds D) Common stock

C) Convertible bonds A convertible bond would generate income from interest payments during the bear market, but if market sentiment becomes bullish, the bond can be converted into common stock, taking advantage of the change in market conditions. None of the remaining choices could fulfill both of these investment objectives.

ZYX Corporation has 100 million shares of common stock authorized in its charter, with 80 million shares outstanding. The board of directors of ZYX could vote to take which of the following actions? A) Announce an additional public offering of 40 million shares of common stock B) Issue 20 million shares of a 4%, $100 par preferred stock, convertible at $50 C) Declare a stock dividend of 10% D) Declare a 2:1 stock split

C) Declare a stock dividend of 10% A corporation cannot issue more shares than authorized. True, there could be a vote to amend the charter, but be careful not to read anything into the question that is not given A 10% stock dividend will require issuing 8 million more shares. That will bring the total outstanding to 88 million. A 2:1 stock split would need an additional 80 million shares and ZYX has only 20 million left. With only 20 million authorized, but unissued shares remaining, where is ZYX going to get 40 million shares for the additional public offering? Likewise, the convertible preferred is convertible into two shares each ($100 par divided by the $50 conversion price). That would also require 40 million shares to be available if everyone elected to convert.

One of the most important roles played by registered representatives is making suitable recommendations to their customers. Doing that requires gathering as much information about the customers as possible. Which of the following factors would likely be the least important when dealing with a couple in their late twenties with two children? A) Values B) Education goals for the children C) Expected retirement age D) Current employment stability

C) Expected retirement age Although saving for retirement is the single most common investment objective, determining an expected retirement age for a couple this young is unrealistic—it is just too far away to make an accurate determination. Meeting the children's educational needs is something that needs to be addressed now. Knowing the reliability of the family's income stream is critical for financial planning. Selecting investments matching the customers' attitudes is necessary to ensure that their values are being met

Which of the following activities are a registered representative's responsibilities? Determining the suitability of various investments for individual customers Describing the characteristics and benefits of various securities products Offering tax advice and assisting customers in completing tax returns Personally holding a customer's securities for a future transaction A) II and IV B) I and III C) I and II D) III and IV

C) I and II

Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business? General partnership Sole proprietorship S corporation C corporation A) II and III B) I only C) I and II D) III and IV

C) I and II Corporations, whether organized as C or S corporations, afford their owners limited liability, which is the protection of their personal assets from losses incurred by the businesses. General partnerships and sole proprietorships subject their owners to personal liability for losses of the business.

Regulation BI contains four key component obligations. Which two of them apply to registered representatives? Disclosure Obligation Care Obligation Conflict of Interest Obligation Compliance Obligation A) II and III B) I and III C) I and II D) III and IV

C) I and II The obligation to disclose all material information and to exercise reasonable diligence, care, and skill in making any recommendation apply to both the member firm and the registered representative. The Conflict of Interest Obligation and the Compliance Obligation belong to the firm. That does not mean you do not have an obligation to disclose any conflicts of interest. That is part of the disclosure obligation. The specified Conflict of Interest Obligation includes the written supervisory procedures and training the firm must provide. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are true? The corporation will be subject to currency risk. The corporation will not be subject to currency risk. The issue must be filed with the SEC. The issue need not be filed with the SEC. A) I and IV B) I and III C) II and IV D) II and III

C) II and IV Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the United States, the issue is not registered with the SEC.

Which of the following are characteristics of both stock rights and warrants? A) One must be a current stockholder to receive them. B) They are frequently used as a sweetener to attract purchasers to another security. C) They offer the holder an opportunity to purchase stock at a fixed price. D) When initially offered, neither one has intrinsic value.

C) They offer the holder an opportunity to purchase stock at a fixed price. Rights and warrants are equity securities granting the holders the ability to purchase shares of the issuer at a pre-determined price. In the case of a rights offering, the price is always below the current market price. In the case of warrants, the exercise price is always above the current market price. That means only the rights have intrinsic value when initially offered. It is the warrants that are frequently attached to a new issue to make the offering more attractive. It is only the rights where one must be a current stockholder to initially obtain them. After that, they trade in the secondary market.

A company has reverse split its common stock. The effect on the earnings per share will be A) no effect. B) none of these. C) an increase. D) a decrease.

C) an increase. When a reverse split takes place, the number of outstanding shares is reduced. Because the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.

A customer opens an account, and payment and delivery instructions are established. Beyond the opening of the account, these instructions may A) be changed at any time for all transactions going forward. B) be changed for individual transactions only. C) be changed for individual transactions, or going forward, for all transactions. D) not be changed unless a new account is established.

C) be changed for individual transactions, or going forward, for all transactions. Once payment and delivery instructions are established at the time the account is opened, they can be changed for any individual transaction or for all transactions going forward.

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

C) filing an updated prospectus. Prospectus filing is a requirement of the Securities Act of 1933.

One of the effects of Regulation BI is to place a limitation on the use of the descriptive term A) registered representative. B) stockbroker. C) financial advisor. D) agent.

C) financial advisor.

If the dollar price of a municipal bond is 101 and, at that price, the basis is 6.10, the nominal yield is A) less than 6.10%. B) less than the coupon rate. C) greater than 6.10%. D) exactly 6.10%.

C) greater than 6.10%. Basis is a common synonym for yield to maturity, especially for municipal bonds. For any bonds trading at a premium, the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are as follows: yield to call, yield to maturity, current yield, and nominal yield.

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should A) sell the bonds at the current market price. B) continue to hold the bonds and receive interest payments. C) tender the bonds. D) convert the bonds into common and sell the converted shares.

C) tender the bonds. The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds.

Stocks that are listed on the NYSE can also traded in all of the following except A) the third market. B) the fourth market. C) the CBOE (Chicago Board Options Exchange). D) an electronic communications network (ECN).

C) the CBOE (Chicago Board Options Exchange). NYSE-listed stocks would never be listed on an options exchange such as the CBOE; those are strictly for trading options, not stock. The third market is the trading of listed securities in the over--the-counter market. The fourth market is the use of ECNs for institutions to trade without the "middleman," a broker-dealer.

PDQ Corporation has a 6.25% $100 par value convertible preferred stock (conversion ratio of 4) outstanding. The stock has an antidilution covenant. If PDQ declares a 10% stock dividend, the antidilution covenant will adjust A) the par to $90. B) the conversion price to approximately $27.50. C) the conversion price to approximately $22.73. D) the par to $110.

C) the conversion price to approximately $22.73. When a $100 par value preferred stock is convertible into four shares of common stock, the conversion price is $25 per share, ($100 ÷ 4 = $25) The antidilution covenant means the investors will have the same conversion rights after a stock split or stock dividend as they had before After a 10% stock dividend, each share of preferred stock will be convertible into 4.4 shares (4 shares x 110% = 4.4). The par value of the preferred stock does not change. Divide that $100 par value by the new number of shares to get the new conversion price It looks like this: $100 ÷ 4.4 = 22.73. Alternatively, you can divide the original conversion price of $25 by 110% arrive at the same answer.

A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into five shares of common stock. The conversion price of the common stock is A) $100. B) $1,200. C) $25. D) $20.

D) $20. Par value divided by conversion price equals the number of shares into which the security is convertible. If this security is convertible into five shares, we need to know what number goes into $100 five times. That number is $20. The current market value of the preferred stock is unnecessary information.

Which of the following statements regarding convertible bonds is not true? A) Convertible bondholders are creditors of the corporation. B) If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature. C) Coupon rates are usually lower than nonconvertible bond rates of the same issuer. D) Coupon rates are usually higher than nonconvertible bond rates of the same issuer.

D) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. Coupon rates are not higher; they are lower because of the value of the conversion feature. The bondholders are creditors. If the stock price falls, the conversion feature will not influence the bond's price.

Your customer is interested in long-term corporate bonds. Which of the following interest rate environments makes a call protection feature most valuable to your customer? A) Rising interest rates B) Volatile interest rates C) Stable interest rates D) Declining interest rates

D) Declining interest rates A call protection feature is an advantage to bondholders in periods of declining interest rates. When interest rates are falling, issuers are more likely to call in bonds previously issued at higher interest rates. For bondholders, calling bonds creates reinvestment risk, as they are unlikely to be able to reinvest at the rate they had been earning. Call protection gives the bond holder a specified length of time during which the bond cannot be called.

An employee of a firm registers to open an account at another member firm. Under FINRA rules, all of the following statements are true except A) the employee must receive prior written permission from the employing member firm. B) the employing member firm must be notified, in writing, of the intent to open the account. C) the employing member firm must receive duplicate statements and confirmations if requested in writing. D) FINRA must receive duplicate statements and confirmations for each transaction.

D) FINRA must receive duplicate statements and confirmations for each transaction. Under FINRA rules, the employing member must be notified, in writing, of the prospective account and must give prior written approval before the account can be opened. It must be provided with duplicate statements and confirmations only if it makes a written request. There is no requirement that FINRA be either notified or provided with duplicate statements and confirmations

A 2-for-1 split does which of the following? Increases the number of outstanding shares Decreases the number of outstanding shares Decreases par value per share Decreases retained earnings A) II and IV B) II and III C) I and IV D) I and III

D) I and III After a 2-for-1 stock split, the number of outstanding shares doubles, and the par value per share decreases by half. Retained earnings are not affected.

Investors placing zero-coupon bonds in their portfolios are most likely to be looking to provide accumulation of capital. current income. protection against reinvestment risk. tax deferral. A) II and III only B) I and IV only C) II and IV only D) I and III only

D) I and III only Zero-coupon bonds are always purchased at a discount because they pay no interest. At maturity, the bondholders receive the maturity value. That represents the initial investment plus interest. Therefore, the investors are receiving more capital than invested (capital accumulation). Zero-coupon securities avoid reinvestment risk because there are no periodic interest payments to be reinvested. When you purchase one of these securities, the quoted yield to maturity is exactly what you will earn if you hold it to the end. With no interest payments, there is no current income. There is no tax deferral with a zero. In fact, unless it is a zero coupon municipal bond, there is phantom income; income not currently received but currently taxable.

A customer, without giving written authorization, may permit a registered representative to exercise his discretion as to the security. the price at which to enter the order. the amount of shares. when to enter the order. A) I and II B) III and IV C) I and III D) II and IV

D) II and IV Registered representatives may choose the price or timing of an order without having discretionary authority.

Which the following statements regarding customer accounts is not true? A) Many states publish a legal list of securities approved for fiduciary accounts. B) The customer who opens a numbered account must sign a statement attesting to ownership. C) Stock held under joint tenants with rights of survivorship (JTWROS) goes to the survivor in the event of the death of one of the tenants. D) Margin trading in a fiduciary account does not require any special documentation.

D) Margin trading in a fiduciary account does not require any special documentation. Trading on margin is prohibited in fiduciary accounts except with the appropriate documentation. Numbered accounts are permitted with a letter signed by the customer. Stock held under JTWROS passes to the survivor(s) in the event of death of one of the tenants.

If a customer wishes to open a cash account, who must sign the new account form? A) Only the registered representative B) The customer, the registered representative, and the principal C) Only the customer D) Only the principal

D) Only the principal Neither the customer's signature nor the registered representative's signature is required to open a cash account. A principal must review and accept the new account by signing the form.

If earnings decline significantly, which of the following employer-sponsored qualified retirement plans can reduce or even eliminate its contribution for the year? A) Defined benefit plan B) 401(k) plan C) Defined contribution plan D) Profit-sharing plan

D) Profit-sharing plan A special feature of the profit-sharing plan is that employer contributions may be reduced or skipped when earnings fall. In each of the others, contributions must be made at the stated or, in the case of the defined benefit plan, the actuarially computed amount.

Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account? A) The custodian cannot exercise rights; they can only be sold. B) The rights can be exercised or sold only if the custodian is also the donor. C) The custodian can exercise, sell, or allow the rights to expire as he deems prudent. D) The custodian can exercise or sell the rights as he deems prudent.

D) The custodian can exercise or sell the rights as he deems prudent. One thing that is never considered prudent is to let the rights expire. Even if the custodian does not believe adding more of the stock to the account is proper, there is a value to the rights, and the best interest of the minor is served by turning those rights into cash. Custodians in these accounts are able to sell or exercise the right, regardless of any relationship existing between them and the donor.

The XYZ Corporation has issued some 4% callable bonds maturing in 20 years. The bonds are callable at 102 commencing in 10 years. Regarding these bonds, which of the following statements is not correct? A) XYZ will most probably call these bonds when it can refund the issuer at a lower interest rate. B) The bonds will likely be called in a declining interest rate market, forcing the bondholders to reinvest at lower rates. C) The call premium generally will not compensate the bondholder for the loss of interest if the bond is called. D) These bonds will appreciate faster in declining interest rate markets than comparable bonds without a call feature.

D) These bonds will appreciate faster in declining interest rate markets than comparable bonds without a call feature. All things being equal, callable bonds will not show as much appreciation in a declining interest rate market as bonds without a call feature. Logically, as interest rates fall, those bonds will be called making them less attractive than bonds where the higher interest rate payments will continue until maturity. It is correct that the premium ($20 in this question) is generally not going to equal the amount of interest that the investor would have been able to earn on the bond. It is some compensation, but not full. The bonds will be called when interest rates have declined, and the investor will now have the cash but faces the reinvestment risk of having to put the money to work at those lower interest rates.

ABC Corporation has outstanding a 7.75% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is true? A) To profit in this situation, the investor should buy the stock and short the bonds. B) An arbitrage opportunity does not exist in this situation. C) The bond is at parity with the stock. D) To profit in this situation, the investor should buy the bonds and short the stock.

D) To profit in this situation, the investor should buy the bonds and short the stock. With a conversion price of $40, the bond is convertible into 25 shares of ABC common stock ($1,000 / $40 = 25 shares). As the common stock is currently trading at $45 per share, the value of the stock as converted would be $1,125 (25 shares × $45 = $1,125), which is greater than the current price of the bond ($1,020). Therefore, the bond and the stock are not at parity. An investor could profit in this situation by shorting the stock and buying an equivalent number of bonds. A bond could be purchased for $1,020 and immediately converted into stock worth $1,125—a risk-free profit opportunity.

Which of the following best describes a debenture? A) A long-term corporate debt obligation with a claim against securities rather than against physical assets B) A corporate debt obligation that allows the holder to purchase shares of the company's common stock at specified dates before maturity C) An investment in the debt of another corporate party D) Unsecured corporate debt

D) Unsecured corporate debt A debenture is unsecured corporate debt.

An investor purchased a new issue corporate zero-coupon bond for $600. The bond has a maturity of 20 years. Six years later, the investor sells the bond for $700. For tax purposes, this would result in A) a capital loss of $280. B) a capital gain of $20. C) a capital gain of $100. D) a capital loss of $20.

D) a capital loss of $20. The $400 discount is accreted over the 20 years to maturity. That is an annual accretion of $20. After 6 years, that is $120, making the tax basis of the bond $720. Because the sale at $700 is $20 less than the basis, the investor has a long-term capital loss.

An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is A) a limited partnership. B) a general partnership. C) a C corporation. D) an S corporation.

D) an S corporation.

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

D) 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.

All of the following statements regarding a transfer on death (TOD) account are correct except A) probate is avoided. B) only those assets held at the broker-dealer are transferred. C) the owner of the account may change beneficiaries at will. D) estate taxes are reduced.

D) estate taxes are reduced.

If interest rates increase, the interest payable on outstanding corporate bonds will A) increase. B) decrease. C) change according to the inverse payout theory. D) remain unchanged.

D) remain unchanged. The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year, regardless of the prevailing interest rates in the market. It is the market price of bonds—not the interest payable—that responds inversely to changes in interest rates.

The legal contract stating the issuer's obligation to pay back a specific amount of money on a specific date to its bondholders is best described as A) the official notice of sale. B) the prospectus. C) the official statement. D) the trust indenture.

D) the trust indenture. A trust indenture delineates the covenants or promises made by an issuer to its bondholders. Those would include the amount of the debt, the maturity date, and the rate of interest. A trustee would also be identified in the indenture who would act on behalf of the bondholders in the event of default on any of the indenture's provisions.

When comparing preemptive rights and warrants, one similarity is A) the method by which the issuer distributes them to shareholders. B) their exercise price relative to the market price of the underlying stock. C) the length of time before they expire. D) their voting privilege.

D) their voting privilege. In an odd play on words, the only similarity here is that neither of them have voting rights. Warrants are long-term while rights are short-term. The exercise price of a right is below the current market while that of a warrant is above. Only rights are distributed to existing shareholders in proportion to the investor's current stock ownership. Warrants are not sent to shareholders; they are most often part of another issue.

One of your customers has a JTWROS account and an individual account. The individual account is the one approved for options trading. The customer wishes to make a large options trade and asks you to transfer a substantial sum from the cash balance in the joint account to the individual account. To do this, A) you need the authorization of both parties on the account and the approval of a designated principal. B) you need the approval of a designated principal. C) you need the authorization of the customer. D) the check would have to be made payable in the name of all the owners of the JTWROS account.

the check would have to be made payable in the name of all the owners of the JTWROS account. Look at this question as if the client making the request asked for a check in their name only to be sent from the joint account. We know that any certificates or checks issued must be in the names of all the joint account holders.