125 Question Quiz (4)
XYZ Technology Fund permits rights of accumulation. A shareholder has invested $9,000 and signed a letter of intent for a $15,000 investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent? A) $6,000 B) $5,280 C) $9,000 D) $15,000
A) $6,000 The shareholder must contribute the full $15,000, so he owes an additional $6,000. Reinvested dividends and changes in the net asset value do not count toward a breakpoint during the period of a letter of intent. LO 8.d
A 5% bond is trading at a premium. Which of the following would be the bond's highest yield? A) Coupon yield B) Current yield C) Yield to maturity D) Dividend yield
A) Coupon yield If a bond is trading at a premium, its coupon rate will represent the highest of its yields. Bonds do not have a dividend yield. LO 4.e
If one wanted information on municipal fund securities, it would be found on A) EMMA. B) the RTRS. C) the Nasdaq Level 2 service. D) TRACE.
A) EMMA. EMMA, the electronic municipal market access, carries information about municipal fund securities (Section 529 plans). Why not RTRS? That is the Real Time Reporting System and it provides real time trading information. Section 529 plans do not trade in the secondary markets. LO 17.b
If a stock undergoes a 1-for-5 reverse split, which of the following increases? I. Market price per share II. Number of shares outstanding III. Earnings per share IV. 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. LO 3.b
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) $90,000 B) $0 C) $50,000 D) $100,000
B) $0 Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes. LO 13.h
One of your customers takes a short position in 300 shares of LOP common stock. The sale price is $70 per share. One month later, with the stock selling at $73 per share, the investor purchases 3 LOP Sep 75 calls at a premium of 3.25. What is the investor's breakeven point? A) $60.25 per share B) $66.75 per share C) $69.75 per share D) $71.75 per share
B) $66.75 per share This customer is looking for the price of the stock to decline. The proceeds of the sale were $70 per share and the cost of the "insurance" (the call option) was 3.25. That means that the customer will not start making money until the stock falls below proceeds minus cost or 66.75. In a question like this, the current market price of the stock and the strike price of the option are irrelevant. Breakeven on short stock and a long call position is the proceeds minus the premium. As is always the case when computing breakeven, the number of shares and number of option contracts is meaningless, breakeven is the same price for one or one thousand. LO 10.h
An investor mentions the term level load fund shares to a registered representative. The investor is referring to A) shares of a closed-end fund. B) Class C shares. C) Class A shares. D) Class B shares.
B) Class C shares. Class C shares are referred to as level load because the charges never fluctuate. Shares are purchased at net asset value (no front-end load), and there is a back-end load (CDSC), generally for 12 months. The 12b-1 fees on Class C shares are higher than on Class A shares and remain so until the position is liquidated. Class C shares are most suitable for investors who will not maintain the position for the long term. LO 8.d
Which of the following would not be a valid use of the partnership democracy? A) Removing the general partner B) Deciding which partnership assets should be liquidated to pay creditors C) Consenting to a legal judgment against the partnership D) Consenting to an action of a general partner that is contrary to the agreement of limited partnership
B) Deciding which partnership assets should be liquidated to pay creditors Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in being treated as general partners with respect to liability and possible loss of limited partner status. LO 11.c
Which of the following system characteristics can be associated with the Trade Reporting and Compliance Engine (TRACE)? I. Both sides of the transaction must report. II. Only the buyer must report. III. Money market securities are excluded from the reporting system. IV. It is an execution and trade reporting system. A) II and III B) I and III C) II and IV D) I and IV
B) I and III TRACE requires that both sides of the transaction report corporate bond trades that occur in the over-the-counter (OTC) secondary market. Money market securities are one of the specific exclusions from the trade reporting system. Trace is NOT an execution system. LO 17.b
Which of the following statements regarding an official statement are true? I. It is required by the SEC for all new issues. II. It is required by the Municipal Securities Rulemaking Board (MSRB) for all new issues. III. It must be delivered to purchasers at or before settlement. IV. It is generally used by underwriters to help sell the issue. A) II and III B) III and IV C) I and IV D) I and II
B) III and IV An official statement is a document similar to a prospectus and is furnished, in most cases, to buyers of new issue municipal bonds. SEC rules require that an official statement be prepared for most—but not all—new municipal issues. The MSRB has no such requirement, as it does not regulate issuers. LO 6.a
All of the following statements regarding dollar cost averaging are correct except A) dollar cost averaging is the investment of a fixed amount of money each period. B) dollar cost averaging decreases the risk of loss. C) dollar cost averaging is a passive investment strategy. D) an employee stock purchase plan is one way to use dollar cost averaging.
B) dollar cost averaging decreases the risk of loss. Dollar cost averaging is a passive investment strategy using a fixed dollar amount to purchase shares no matter what the price is. The fixed dollar amount buys more shares when the price is lower and fewer shares when the price is higher. While this strategy can lower the average cost per share over time, it does not assure profitability or decrease the risk of loss. LO 8.e
The requirements of ERISA apply to pension plans established by A) both public and private sector organizations. B) private sector organizations only. C) public entities only. D) municipal governments.
B) private sector organizations only. ERISA was established to protect the retirement funds of employees working in the private sector only. It does not apply to employees of public sector entities such as city and state governments. LO 1.i
Treasury stock is A) issued by the U.S. Treasury Department. B) stock repurchased by the issuer. C) authorized but unissued stock owned by the company. D) preferred stock.
B) stock repurchased by the issuer. A company may, from time to time, go into the market and buy some of its own outstanding stock, which is then placed in the Treasury and called Treasury stock. Treasury stock has no voting rights and does not receive dividends. Treasury stock is not included when calculating shareholders' equity or net worth. LO 3.a
FINRA Rule 2210, communications with the public, has a number of filing requirements. Some communications are prefiled, others are postfiled, and some are excluded from filing with FINRA. Included in the list of exclusions would be retail communications A) that do no more than identify and recommend a specific registered investment company or family of registered investment companies. B) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker. C) dealing with specific index funds that previously have been filed with FINRA and that are to be used, with the only change being a recommendation of index exchange-traded funds from the same sponsoring organization. D) that do not make any financial or investment recommendation, but only promote a service offered by the member.
B) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker. A communication limited to identifying the member's exchange or market-maker symbol is excluded from the FINRA filing requirements. A communication that identifies and recommends a specific investment company or companies must be filed. When previously filed material is used, no filing is necessary as long as there is no material change. However, changing from recommending specific funds to specific ETFs is a material change and would require filing. A retail communication promoting a service offered by a member firm is a communication that would likely need filing with FINRA. LO 19.c
The industry term "junk bond" applies to a bond with a Standard and Poor's rating no higher than A) BBB. B) C. C) BB. D) B.
C) BB. Once a bond's rating has fallen below the top four grades (AAA, AA, A, and BBB), it is no longer considered investment grade. At that point, BB (or Moody's Ba) or lower, it is considered a high-yield or junk bond. LO 4.f
If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are true? I. The corporation will be subject to currency risk. II. The corporation will not be subject to currency risk. III. The issue must be filed with the SEC. IV. The issue need not be filed with the SEC. A) II and III B) I and IV C) II and IV D) I 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. LO 4.d
Regulation T governs the purchase of all of the following except A) corporate convertible bonds. B) listed options. C) U.S. government bonds. D) American depositary receipts.
C) U.S. government bonds. Regulation T applies only to nonexempt securities. Because governments and municipals are exempt, there is no federal regulation. LO 16.d
A customer should receive a current option disclosure document before or at the date of A) the first trade. B) the first account statement. C) account approval. D) settlement.
C) account approval. The customer must receive a current disclosure document at or before the time their account receives approval for option trading. LO 10.j
An investor's portfolio contains a number of different securities. Included are equity and debt positions in several business development companies (BDCs). It would be correct to state that A) distributions from both BDC positions are treated as interest. B) distributions from the equity BDC positions are treated as a return of capital while those from the debt positions are interest. C) distributions from the equity BDC positions are treated as dividends while those from the debt positions are interest. D) distributions from both BDC positions are treated as dividends.
C) distributions from the equity BDC positions are treated as dividends while those from the debt positions are interest. A BDC (business development company) is a specialized type of closed-end investment company. As such, it can issue debt securities as well as equity. Most operate as regulated investment companies (RICs) under the Internal Revenue Code. Being a RIC requires distributing at least 90% of the company's net investment income. This, just as with other investment company distributions, is treated as a dividend. When the BDC issues a debt security, just as with other debt securities, interest is paid to the lenders. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 8.b
A qualified legal opinion issued for a municipal bond underwriting means that A) the bond attorney is qualified to express her opinion on the bond. B) the revenue bond issue has certain debt limitations. C) the legal opinion is qualified with restrictions and conditions. D) the bond counsel is considered competent.
C) the legal opinion is qualified with restrictions and conditions. The word qualified describes the legal opinion, not the attorney (or bond counsel) who issued it. A qualified legal opinion is one in which the bond counsel expresses reservations about conditions that may affect the bond's status. An unqualified legal opinion is rendered without restriction or condition. LO 6.a
All of the following statements regarding variable annuities are true except A) variable annuities are classified as insurance products. B) variable annuities may only be sold by registered representatives. C) variable annuities offer the investor protection against capital loss. D) insurance companies keep variable annuity funds in separate accounts from other insurance products.
C) variable annuities offer the investor protection against capital loss. A variable annuity is both an insurance and a securities product. An annuitant assumes the investment risk of a variable annuity and is not protected by the insurance company from capital losses. LO 9.a
Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? A) .1% B) .01% C) 10% D) 1%
D) 1% Rule 144 (sale of restricted or control stock) allows for the sale of 1% of the outstanding shares or the weekly average of the past four weeks' trading volume (whichever is greater) every 90 days. LO 20.f
If your customer bought an original issue discount bond from the Mount Vernon Port Authority, how is the discount on this bond taxed? A) Amortized during the life of the bond and not taxed B) As capital gains C) As ordinary income D) Accreted during the life of the bond and not taxed
D) Accreted during the life of the bond and not taxed Under IRS rules, an owner of an original issue municipal discount bond must adjust the bond's cost basis by accreting the discount over the life of the bond. The accretion is not taxed. LO 6.f
Which of the following money market instruments is most often used by those in the import/export business? A) Negotiable CDs B) Commercial paper C) Variable rate demand notes D) Bankers' acceptances
D) Bankers' acceptances Bankers' acceptances are loans guaranteed by a commercial bank that are typically used to finance international transactions. Although all of the choices are money market instruments, it is the BAs that are primarily used by those engaged in international business. LO 4.c
Municipal Securities Rulemaking Board (MSRB) rules for NYSE member firms are enforced by A) the SEC. B) the MSRB. C) the NYSE. D) FINRA.
D) FINRA. The board's rules are enforced by FINRA for securities firms. The MSRB has rulemaking authority but no enforcement or examination authority. LO 6.h
Under the rules regarding the sales of new equity issues, which of the following relationships to a registered representative are restricted purchasers? I. Aunts and uncles II. In-laws III. Supported persons IV. Grandparents A) I and III B) I and IV C) II and IV D) II and III
D) II and III Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue. LO 20.f
An example of a taxable bond issued by a municipal government is A) a general obligation bond (GO). B) Series EE bonds. C) a tax anticipation note (TAN). D) a Build America Bond (BAB).
D) a Build America Bond (BAB). BABs are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing the cost of issuing municipalities and to stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations. LO 6.b
A document that allows an investor in Class A shares of a mutual fund to receive a breakpoint on an initial purchase without investing the required breakpoint amount is A) the rights of accumulation form. B) the breakpoint sale memorandum. C) the new account form. D) a letter of intent.
D) a letter of intent. The letter of intent (LOI) is a document available to mutual fund investors that allows them to receive breakpoints (discounted sales charges) on the initial and subsequent deposits over a 13-month period. Investors can backdate an LOI up to 90 days to pick up previously invested monies. If backdated, the 13 months begins from that date. There is no rights of accumulation form. Rights of accumulation allow future deposits to receive sales charge discounts when the investment total grows into higher breakpoint levels. A difference between the LOI and rights of accumulation is that the LOI allows for the reduced sales charge starting with the initial payment and rights of accumulation do not apply until the account reaches the breakpoint. The new account form is the opening document of an account and does not provide these benefits. A breakpoint sale is the unethical procedure of selling Class A shares in an amount just below a breakpoint. This usually results in a higher commission to the registered representative and greater cost to the investor. LO 8.d
Pursuant to Regulation T, cash dividends received in a customer's margin account A) cannot be removed. B) must be removed within 30 days of receipt. C) can only be withdrawn if the account is not restricted. D) can be withdrawn anytime within the first 30 days of receipt.
D) can be withdrawn anytime within the first 30 days of receipt If a customer wishes to withdraw cash dividends, the customer must do so within 30 days of receipt. Otherwise, they become a permanent reduction of the debit balance. The customer does not lose the dividend; rather, the dividend amount is now reflected as increased equity in the account. As the debit balance falls, equity in the account goes up dollar for dollar. LO 16.d
Flow-through of income and loss is a feature of A) real estate investment trusts (REITs). B) exchange-traded funds (ETFs). C) unit investment trusts (UITs). D) direct participation programs (DPPs).
D) direct participation programs (DPPs). It is only the DPP where both income and losses pass through to the investor. In the other investments, they are required to pay out at least 90% of their net investment income to investors to maintain their special tax status as regulated investment companies under the Internal Revenue Code. Notice, it is only income that passes through, not losses. LO 11.f
An investor who is bearish on the outlook for Fernweh Travel Services (FTS) sells 100 shares short at $52 per share. Three months later, the market price of FTS shares is $58. Under FINRA rules, a maintenance call will be issued when the per share price of FTS A) increases by more than $17.40. B) decreases by more than $2. C) increases by more than $9.60. D) increases by more than $2.
D) increases by more than $2. A short margin account reaches the maintenance level when the equity in the account reaches 30% of the market value of the short stock. To find that level, divide the credit balance by 130% (or 1.3). Maintenance Call for Short Stock = Credit / 1.3 The credit balance is the sum of the sale proceeds plus the Regulation T initial margin requirement. In our question, sale proceeds are $5,200 ($100 shares times $52 per share). To that we add the 50% Regulation T requirement ($2,600) resulting in a credit balance of $7,800. Dividing that $7,800 by 1.3 = $6,000. That tells us that the highest the price of FTS shares can be is $60 per share. Anything above that will trigger the maintenance call. With the current market price of $58, anything in excess of a $2 per share increase will result in a maintenance call. Remember, when an investor sells short, losses occur as the market price rises. LO 16.d (Page 450)
The Investment Company Act of 1940 prohibits a closed-end management investment company from pursuing all of these activities except A) taking short positions in securities. B) holding more than 3% of another investment company's outstanding shares. C) buying securities on margin. D) paying dividends.
D) paying dividends. Paying dividends is an acceptable activity of any management investment company. Indeed, most of them function as regulation investment companies where, under the conduit theory, they must pay out at least 90% of their net investment income in the form of dividends to shareholders. No registered investment company may purchase securities on margin. Closely related to that is the prohibition against selling short (which must be done in a margin account). A fund may not own more than 3% of the outstanding shares of another investment company. LO 8.j
