90q 5/31

A customer asked you about DEF Corporation stock. After looking at the stock, you noted that it would fit their objectives and they should consider purchasing the stock for their portfolio. Which of the following is true regarding this interaction? A) This is not a recommendation. B) This is a discretionary trade. C) This is a recommendation. D) This is an unsolicited trade.

A reasonable person would see this as a recommendation because the representative went beyond providing information and suggested a course of action. C

A customer has given permission for securities in an investment account to be used for the purpose of other customers who want to borrow them in order to sell those securities short. This would have entailed the customer signing A) a margin account form. B) a loan consent form. C) a hypothecation agreement. D) a credit agreement.

Allowing one's securities to be loaned to others who want to borrow them for the purpose of selling them short would entail signing a loan consent form. This is optional and need not be signed to open a margin account or any other. B

All of the following are benefits of using a prime broker except A) consolidation of records. B) research. C) multiple executing brokers. D) cost savings.

An institutional investor may select one firm (the prime broker) to provide custody and financing of securities while other firms, called executing brokers, handle all trades placed by the customer. It is not unusual for large companies to use dozens of executing broker-dealers. Trade confirmations from the many executing broker-dealers are consolidated and are provided along with account statements by the prime broker. Prime brokerage is efficient and saves the customer time and money. Research is not associated with prime brokerage accounts. LO 1.e B

Which of the following for call option contracts is true? A) Maximum gain is the same for both parties. B) Breakeven is the same for both parties. C) Maximum loss is the same for both parties. D) Maximum gain and loss are the same for both parties.

Every option is a two-party contract. One party's gain is the other party's loss. Therefore, maximum gain and maximum loss for each party is different. But breakeven is the same for both parties. One wants the underlying stock to be above the breakeven, while the other wants the underlying stock to be below the breakeven. LO 5.a B

A 72-year-old customer has a $30,000 required minimum distribution (RMD) calculated to be taken from an IRA. If the customer is in the 20% income tax bracket and only withdraws $25,000 from the account, how much in penalties will the customer owe? A) $7,500 B) $1,250 C) $6,250 D) $6,000

Failure to meet the required minimum distribution (RMD) results in a 25% penalty tax on the shortfall. In this case, taking only $25,000 when $30,000 should have been taken leaves $5,000 exposed to the 25% penalty tax: $5,000 x 25% = $1,250 B

A broker-dealer has engaged in a reverse repurchase (repo) agreement. How was this done? A) An initial purchase is followed by a sale later, at a lower price. B) An initial sale is followed by a purchase later, at a higher price. C) An initial sale is followed by a purchase later, at a lower price. D) An initial purchase is followed by a sale later, at a higher price.

In a reverse repurchase (repo) agreement a dealer agrees to buy securities from an investor and sell them back later at a higher price. In other words, the reverse of a repo agreement. D

Of the following, which would not be considered institutional communications with the public? A) An internal memo promoting a new product that will be offered to your firm's institutional customers only B) A letter to another broker-dealer regarding potential business together C) A letter to a municipality offering your firm's services as an underwriter D) A communication with an individual designated to act on behalf of your institutional customer

Institutional communications specifically exclude internal communications such as memos. Communications with another member firm, a government entity, such as a municipality or with someone designated to act on behalf of one of your firm's institutional customers, would all fall within the definition of institutional communications. LO 11.i A

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

It is the US treasury department that determines the types and quantities of government securities to be issued each week in order to accommodate budgetary needs. At the time of issue, the federal. reserve board acts as the Treasury Departments agent.

Margin Maintenance requirements are set by A) the FBI. B) the FRB. C) FINRA. D) the SEC.

Maintenance requirements are set by the governing SRO. FINRA is the best answer of this set. FRB sets the initial margin requirement along with the SRO minimum. The FRB does not set maintenance requirments.

Which of the following is true regarding a member firm operating under Financial Industry Regulatory Authority (FINRA) membership or the membership of another self-regulatory organization (SRO)? A) Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options, and others or limit the products they offer to only a few. B) Member firms may never incorporate proprietary trading into their business model. C) Member firms must always accommodate dealing with retail investors and not limit business to that done with other industry professionals. D) Member firms are required to be full-service broker-dealers.

Member firms can offer all types of investment products such as stocks, bonds, mutual funds, and derivatives like options and others (be full service) or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors. A

Money market instruments are typically A) fixed-income (debt) securities with short-term maturities. B) equity securities with short-term maturities. C) equity securities with short- to intermediate-term maturities. D) fixed-income (debt) securities with short- to intermediate-term maturities.

Money market instruments are fixed-income (debt) securities with short-term maturities, typically one year or less. LO 3.f A

All of the following statements about a bond selling above par value are true except A) the current yield is higher than the yield to maturity. B) the nominal yield is lower than the yield to maturity. C) the nominal yield always stays the same. D) the yield to maturity is lower than the nominal yield.

Nominal (coupon) yield is fixed and stays the same with all bonds. A bond selling above par is selling at a premium, so the yield to maturity is lower than the current yield—which, in turn, is lower than the nominal yield. LO 3.a

All of the following statements about a bond selling above par value are true except A) the current yield is higher than the yield to maturity. B) the nominal yield always stays the same. C) the nominal yield is lower than the current yield. D) the yield to maturity is lower than the nominal yield.

Nominal (i.e., coupon) yield is fixed and stays the same with all bonds. A bond selling above par is selling at a premium, so the yield to maturity is lower than the current yield—which, in turn, is lower than the nominal yield. LO 3.a

After the issuer files a registration statement with the Securities and Exchange Commission (SEC), the time known as the cooling-off period begins. This allows a registration to become effective as early as A) 20 business days after the date the SEC has received it. B) 40 business days after the date the SEC has received it. C) 40 calendar days after the date the SEC has received it. D) 20 calendar days after the date the SEC has received it.

Once the registration statement has been received by the SEC, a cooling-off period begins and it must last at least 20 calendar days. This allows the registration to become effective as early as 20 calendar days after the date the SEC has received it. D

Deflationary periods are characterized by all of the following except A) increased consumer demand. B) coinciding with recessions. C) a decline in prices. D) rising unemployment.

Periods of deflation tend to occur during recessions. Consumer demand decreases, leading to declining prices. When demand decreases, so does production, which leads to rising unemployment. LO 9.e A

An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place? A) Rights will be distributed to existing stockholders with an exercise price lower than the current market value. B) Rights will be distributed to existing stockholders; they have only two options: exercise the rights or let them expire. C) Warrants will be distributed to existing stockholders and they will have two to five years to decide whether or not to buy the stock at the strike price. D) Warrants will be distributed to existing stockholders with an exercise price equal to the current market value.

Preemptive rights intitle existing common stockholders to maintain their proportionate ownership shares in a company by buying issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30-45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription. A

The Federal Reserve is concerned that the economy is slowing. With this in mind, which of these actions would the Federal Reserve most likely engage in? A) Double the reserve requirements for member banks B) Engage in open market sales of T-bills C) Raise the margin requirements under Regulation T D) Open market purchases of T-bills

Purchasing T-Bills would push money into the economy, increasing the money supply. Lower rates are designed to encourage borrowing in an effort to stimulate growth. Raising margin rates or reserve requirements is considered a tightening action, which will dampen economic activity. Selling T-bills will reduce the money supply and raise rates, which is also a tightening action. D

Each of the following is defined as an investment company except A) A closed-end management company. B) Real estate investment trusts (REITs). C) Fixed and nonfixed unit investment trusts (UITs). D) An open-end management company.

Real Estate investment trusts (REITs) are not investment companies such as UITs and management companies (both open and closed-end) B

The maximum potential loss for an investor short a put option is A) unlimited. B) strike price minus the premium received. C) the premium received. D) strike price plus the premium received.

Short puts are bullish. In wanting the stock price to rise, one's risk is that the stock falls in price below the breakeven point. The maximum loss occurs if the stock falls to zero. Therefore, the maximum loss on a short put is equal to the breakeven B

T-notes are the U.S. government's A) only callable debt. B) long-term debt of over 10 years. C) intermediate-term debt of 2-10 years. D) short-term debt of 1 year or less.

T-notes have maturities of 2-10 years when issued. The 10-year T-note yield is an important benchmark for interest rates. C

An investor holds a 5% bond callable in six years and maturing in eight years. The bond's current yield (CY) measures its annual coupon payment relative to A) par value. B) its market price. C) its value when callable. D) its value at maturity.

The CY measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation: annual coupon payment / market price = current yield B

Under regulation S-P, nonpublic personal information would not include a customer's A) home address. B) social security number. C) information collected through an internet cookie. D) account balance.

The SEC in Regulation S=P notes examples of nonpublic information to onclude a customer's social security number, account balances, transaction history, and any information collected through an internet cookie. A home address would not be considered nonpublic personal information. A

Which of the following is not a characterization of the Securities Act of 1933? A) Paper Act B) Truth in Securities Act C) Exchange Act D) Prospectus Act

The act that regulates exchanges and members is the exchange act of 1934. The securities ACT of 1933 regulates new issues (new issues act) requiring registration (paper act) along with full disclosure (prospectus or truth in securities act). C

Which of the following is not part of the expense ratio of a mutual fund? A) Manager's fee B) Front-end load C) 12b-1 fees D) Legal fees

The expense ratio does not include sales charges or loads. The other items here are normally included in the expense ratio of a fund.

The rate that commercial money center banks charge each other for overnight loans is A) the federal funds rate. B) the broker call loan rate. C) the discount rate. D) the prime rate.

The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more. A

Two years ago Joshua Ryan bought 100 shares of XYZ at $60 per share. While he held the stock, it paid dividends of $1 the first year and $1.50 the second year. Joshua sold the shares at $40 per share after a 2:1 stock split. How much gain or loss did he incur per share for tax purposes? A) $20 loss per share B) $10 gain per share C) $17.50 loss per share D) $12.50 gain per share

The formula to calculate a gain or loss for tax purposes is the proceeds minus the cost basis. He bought the shares for $60, and then there was a 2:1 split so the cost basis was adjusted to $30 per share. He sold at $40 so he had a $10 gain. Dividends are not part of the calculation for gain or loss. LO 2.h B

The maximum gain on a short put is A) the strike price. B) strike price + premium. C) strike price - premium. D) the premium.

The maximum gain on any short option position is the premium received. The seller of the option is hoping the contract goes out of the money and expires unexercised. LO 5.a D

The federal agency that oversees the national banks and other financial institutions is A) the Office of the Comptroller of the Currency. B) the Internal Revenue Service. C) the Inland Revenue Service. D) the Financial Crimes Enforcement Network.

The offcie of the comptroller of the currency supervises nearly 1400 national banks, federal savings associations, and federal branches and agencies of foreign banks operating in the United States. A

A corporation sells shares to the investing public in order to raise capital. This is known as A) an issuer transaction. B) a primary, or investor-to-investor, transaction. C) a secondary market transaction. D) an exchange market execution.

The primary market is where securities are sold to the investing public by the issuer wishing to raise capital. These are known as primary market or issuer transactions. A

All of the following are true regarding breakpoints for mutual funds except A) the greater the investment, the lower the sales charge. B) breakpoints must be disclosed to potential investors. C) a breakpoint sale is considered to be a sale just below a breakpoint. D) the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold.

There is no standardized indurstry mandated breakpoint schedule. Offering breakpoints and where they occur is at the discretion of the investment company. In accordance with a breakpoint scheudle, the greater the investment, the lower the sales charge will be. Aa breakpoint sale occurs when a sale is made just below a breakpoint with the intent of the registered representative to be the recipient of a higher sales commission. In this light, disclosure of breakpoints when they are offered is required. D

BigCo Corporation's board of directors declares a $0.75 per share dividend on Tuesday, June 15. The dividend will be paid to shareholders of record on Monday, July 5. The dividend will be sent to shareholders on Monday, July 26. What is the last day to purchase the stock and receive the dividend assuming a regular way settlement? A) July 3 B) July 1 C) July 2 D) June 30

This is a potent example of a difficult question that requires you to slow down and think it through. The ex-date for a corporation will be one business day prior to the record date. The record date is July 5. The day before that is July 4, which is a Sunday and a holiday, not a business day. The days before that are Saturday and Friday. The first business day before the ex-date is Friday, July 2. The last day to purchase the stock and qualify for the dividend is the day before the ex-date (July 1). The only holidays we have heard of appearing on the exam are July 4 and December 25. If a holiday happens to fall on a weekend, then the fact that the day is also a holiday is irrelevant. LO 2.b B

The Big Shoe Sneaker Company is a small manufacturer of athletic shoes. It is selling $100 million of its stock. This will be its third public offering of the company stock. It will use the money to enhance both marketing and production with a plan to grow the business and obtain a Nasdaq listing in two or three years. After the initial sale of the new shares, buyers of the stock in the over-the-counter market should expect to receive the final prospectus for how many days? A) 40 days B) 25 days C) 90 days D) Buyers in the secondary market are never entitled to the initial public offering (IPO) prospectus

This is an additional public offering (APO) of an unlisted, non-Nasdaq, security. The requirement is that the prospectus be made available to buyers in the secondary market for 40 days after the release date. The other requirements are: listed IPO—25 days, listed APO—0, nonlisted IPO—90 days. LO 1.b A

The personal data assistant maker Hands-On, Inc., spent considerable resources developing a new product that used a unique user interface. Unfortunately, the interface proved a failure and was quickly surpassed by a competitor's system. The firm's stock fell as a result. This is an example of A) systematic risk. B) market risk. C) nonsystematic risk. D) sales risk.

This is an issue that applies to just this issuer - a nonsystematic risk. C

BigTel Inc., has been the only provider of telephone service for over a century. The courts have declared BigTel is an unlawful monopoly and orders the company to break into smaller, competing companies. Owners of BigTel stock will retain their shares of BigTel (now smaller) and receive shares of three new companies: East-Tel, Cent-Tel, and West-Tel. Which of these is a tax consequence that could occur for this break up of BigTel and the receipt of the new shares? A) Income based on the value of the new shares received B) Capital gain dependent on how long the shares were held C) There is no taxable consequence D) Partial-long-term capital gain

This spinoff is not a taxable event. Each new share will have a new cost basis based on a percentage of the original cost basis. There is no taxable event until shares are sold. LO 2.i C

To prevent inflation by tightening the availability of credit, the Federal Reserve Board (FRB) would do any of the following except A) sell U.S. government securities in open-market operations. B) lower the prime rate. C) raise the reserve requirement. D) raise the discount rate.

To slow the economy in an attempt to prevent inflation by tightening the availability of credit (less money available, which raises interest rates), the FRB can sell US government securities in open-market operations, raise the discount rate and raise the reserve requirement. The prime rate is set by banks not the FRB. B

The monthly unemployment figure is considered a A) coincident indicator. B) lagging indicator. C) leading indicator. D) dragging indicator.

Unemployment is a coincident indicator. There is no draggin indicator. A

A customer receives a Regulation T margin call for $3,200. To meet the deposit requirement, which of the following can be deposited? A) Fully paid for marginable securities totaling $6,400 in market value B) Fully paid for marginable securities totaling $1,600 in market value C) Fully paid for marginable securities totaling $3,200 in market value D) Cash in the amount of $1,600

When meeting a Regulation T margin call with cash, 100% of the call must be deposited -- in this case $3200. If using fully paid for marginable securities to meet the call a deposit totaling twice the amount of the call must be made -- in this case, $6,400. This is because securities are only marginable to 50% of their value. A

A customer has expressed interest in exchange-traded funds (ETFs) and wishes to discuss them with you. You could tell him all of the following except A) short sales and trading on margin are not available for ETF transactions. B) ETFs have a NAV, calculated daily. C) real-time quotes are available for ETFs. D) a share of an ETF represents an entire portfolio, or a specific selection, of securities.

While a NAV is calculated for an ETF, the price is set by the market and changes throughout the trading day. Most ETFs may be traded on margin and sold short. LO 5.j

During the course of a day a customer makes six separate cash deposits at six different branches totaling over $11,000. This may be an example of A) integration, and an SAR should be filed. B) application, and an SAR should be filed. C) extraction, and a CTR should be filed. D) structuring, and a CTR should be filed.

it appears that the customer is structuring deposits to avoid attention being drawn to the amount of cash he is depositing. This activity is called structuring. As the transactions exceed $10,000 in a day of currency, your firm would file a currency transaction report with FindCEN. D

Minimum maintenance requirements in a long margin account is A) 50%. B) 30%. C) 25%. D) 75%.

minimum maintenance for long margin is 25%. In a. short account the minimum maintenance requirement is 30% Initial requirement under regulation T is 50% C

Investors face many different risks. Which of the following would be factors of systematic risk? Decreasing GDP Global security threats Call risk Net sales A) II and III B) II and IV C) III and IV D) I and II

systematic change points to changes in the overall economy. It has an adverse effect on individual securities apart from the company's circumstances. It is generally caused by factors that affect all businesses, such as war global security threats, or rampant inflation. Call risk is dependent on any call features associated with given security, and net sales are an issue of a company's success. No matter how diversified a portfolio is, it remains subject to systematic risk. An investor cannot diversify systematic risk away.

A broker-dealer must make a reasonable effort to obtain the name and contact information for a trusted contact person for a senior customer when doing which of these? A) Opening an account and every two years thereafter B) Opening an account and on the customer's birthday every third year C) Opening an account and annually thereafter D) Opening an account or when updating account information

the requirement is to attempt to obtain this information when opening the account and whenever updating existing account information. D