Chapters 1-10 Practice Exam Questions Final

A) above 5.4%. Answer Explanation: For a discount bond (trading below par value), a bond's yield to maturity (YTM) will always be greater than current yield. Textbook Reference: Please see textbook section 2.2.3

A bond with a 5.1% coupon is trading at $942. It has a current yield of 5.4%. The bond's yield to maturity is A) above 5.4%. B) exactly 5.4%. C) between 5.1% and 5.4%. D) below 5.1%.

B) Financial advisor Answer Explanation: A broker, dealer, or municipal securities dealer that enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities is defined by MSRB rules as a financial advisor. Textbook Reference: Please see textbook section 3.4

A broker, dealer, or municipal securities dealer that enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities is a(n) A) SMMP B) Financial advisor C) Underwriter D) Control person

C) II and III Answer Explanation: GO bonds are used to build facilities for the public like government buildings. Statutory power refers to passing a law that will authorize a local municipality to proceed with issuance of a general obligation bond. This usually requires a voter referendum, but not approval from the state legislature. Textbook Reference: Please see textbook section 3.4.1.1

A city passes a law that permits it to issue new municipal bonds to fund a new city government building. Which two of the following statements are TRUE? I. This is a revenue bond issue II. This is a general obligation bond issue III. The issuer used statutory power to authorize this bond issue IV. The issuer cannot proceed with this issue until it receives approval from the state legislature A) I and IV B) II and IV C) II and III D) I and III

Answer Explanation: Stock splits and reverse splits don't change the total value of investors' holdings. For example, if the investor owned 800 shares at $1 per share before the 1-for-10 reverse split, he/she will own 80 shares at about $10 per share after the event. Textbook Reference: Please see textbook section 1.7.4

A company "reverse splits" its stock on a 1-for-10 basis. If an investor holds 800 shares before the event, what will be the impact of the split, if any, on the total value of the investors' shares? A) Total value will decline by 90% B) Total value will decline by 10% C) Total value will increase by 10 times D) Total value will not change

B) Share repurchase program Answer Explanation: A company that believes its stock is undervalued may decide to buy their own shares in the open market. Textbook Reference: Please see textbook section 9.3.1

A company that believes its stock is undervalued might take which of the following actions? A) Follow-on offering B) Share repurchase program C) Forward stock split D) Leveraged buy-out

C) Units in a fixed portfolio of securities Answer Explanation: Customers who invest in unit investment trusts own units in a fixed portfolio of securities. This is considered an advantage to some investors because they know the securities held by the trust for the life of their investment. Textbook Reference: Please see textbook section 4.4.1.1

A customer that invests in a unit investment trust owns A) Units in a portfolio of securities that is actively managed B) Shares in a fixed portfolio of securities C) Units in a fixed portfolio of securities D) Shares in a portfolio of securities that is actively managed

C) A closed-end fund Answer Explanation: It is not unlikely for shares of closed end funds to trade at prices of 10 20% above or below NAV. Textbook Reference: Please see textbook section 4.5.1.2

A discount of more than 10% below its NAV is most likely found in shares of which of the following? A) An equity mutual fund B) An ETF C) A closed-end fund D) A bond mutual fund

C) File timely periodic reports with the SEC

A failing company becomes delisted by Nasdaq and goes to the OTCBB. What must it do, at minimum, to remain eligible for quotes on the OTCBB? A) Maintain sufficient trading volume B) Amend its by-laws C) File timely periodic reports with the SEC D) Have at least three market makers Answer Explanation: The SEC believes that the investing public needs adequate disclosure about companies that trade in public markets, such as the OTCBB. Timely periodic filings (10K, 10Q, etc.) are one way that issuers can meet this requirement. Textbook Reference: Please see textbook section 9.3.4.1

D) GO bonds with long-term maturities Answer Explanation: Because interest rates are on the rise, the financial advisor will most likely recommend locking in the lowest possible rate for the long-term. Therefore, it is likely to recommend long-term bonds to finance the project. GO bonds are used to finance public projects like government buildings. Textbook Reference: Please see textbook section 3.4.4.1

A municipality is planning to raise money to finance a large government building complex. It hires a financial advisor to provide assistance in planning the new issue. If the advisor believes that interest rates may soon trend higher, the advisor would most likely recommend which one of the following? A) Revenue bonds with medium-term maturities B) TANs C) BANs D) GO bonds with long-term maturities

D) front-running. Answer Explanation: Front-running is the prohibited practice of entering personal trades ahead of customer trades to attempt to capture a better price. Textbook Reference: Please see textbook section 9.5.7

A review of customer account activity shows that a representative and a number of her customers have made similar trades in ABC securities. The trades for the customers have been entered after those made for the account of the representative. This activity may indicate the prohibited practice of A) commingling. B) selling away. C) churning. D) front-running.

A) in a rights offering Answer Explanation: A standby underwriting is used in a rights offering. In a standby underwriting, a bank stands ready to sell any unsold shares after all shareholders have exercised their right to maintain a proportionate interest in the company. Textbook Reference: Please see textbook section 8.3.3

A standby underwriting is used A) in a rights offering B) in a best-efforts underwriting C) for a company going public for the first time D) in a secondary offering

B) No intervention occurs. Answer Explanation: The economy will reach its point of natural equilibrium without any outside forces or interventions, according to the classical theory of economics, or laissez-faire economics. Textbook Reference: Please see textbook section 10.3.1.1

According to classical economic theory, the economy will reach a natural equilibrium if A) The federal government reduces its spending budget. B) No intervention occurs. C) The federal government decreases tax levels. D) The federal government injects cash into the banking system.

A) founder of classical economic theory Answer Explanation: Adam Smith is considered the founder classical economic theory. Textbook Reference: Please see textbook section 10.3.1.1

Adam Smith is most renowned in financial circles as the A) founder of classical economic theory B) creator of the first hedge fund C) first individual to own a seat on the New York Stock Exchange D) author of the first textbook describing how basic economics impacts the daily lives of individuals

C) It can be higher than $10,000 but not lower Answer Explanation: In TIPS, the interest payments and principal value at maturity are indexed to the Consumer Price Index for All Urban Consumers (CPI-U). At maturity, the TIPS holder can receive more than the original principal if inflation is positive. But he/she can't receive less than original principal if inflation is negative (deflation). Textbook Reference: Please see textbook section 3.2.1.4

Alice buys Treasury Inflation-Protected Securities (TIPS) with an original principal value of $10,000. She wants to know what the principal will be if she holds to maturity. The answer is A) It can be lower than $10,000 but not higher B) It can be either lower or higher than $10,000 C) It can be higher than $10,000 but not lower D) $10,000

A) their performance has no correlation to the overall performance of the economy

All of the following are characteristics of counter-cyclical stocks EXCEPT A) their performance has no correlation to the overall performance of the economy B) they often depreciate during times of economic expansion C) they can serve as a hedge to recessionary pressures that cause most stocks to decline D) the stock's price tends to move opposite the general economic trend

B) Exports Answer Explanation: Balance of trade is the difference between a country's exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. Textbook Reference: Please see textbook section 10.4.1

All of the following are debit items in the computation of the balance of trade EXCEPT A) Domestic investments abroad B) Exports C) Foreign aid D) Domestic spending abroad

A) providing checking accounts, savings accounts, and money market accounts The central bank is responsible for the monetary policy of a country. In that role it buys and sells securities from the government and also assists in regulating the banking industry. It does not act as a retail banking operation; so it does not offer checking accounts, savings accounts, or money market accounts to consumers. Textbook Reference: Please see textbook section 10.3.3

All of the following are roles of a central bank EXCEPT A) providing checking accounts, savings accounts, and money market accounts B) implementing monetary policy C) regulating and supervising the banking industry D) acting as banker for the government

D) Electric utilities Answer Explanation: Municipal governments like states, cities, towns, villages, and counties issue GO bonds to finance projects for the public good. Public schools also issue GO bonds for this purpose. Revenue bonds raise debt service from user fees. Public utilities and private sector corporations are common issuers of revenue bonds. Textbook Reference: Please see textbook section 3.4.1

All of the following are typical issuers of general obligation bonds EXCEPT A) School districts B) Villages C) States D) Electric utilities

D) transaction fees. Answer Explanation: The order ticket is completed prior to order execution and does not include transaction fees such as commissions, mark-ups, or mark-downs. Textbook Reference: Please see textbook section 9.4.1

All of the following items are included on an order ticket except the A) terms and conditions of the order. B) time the order was received. C) customer account number. D) transaction fees.

A) REITS must have a minimum of 90% of their total assets invested in real estate Answer Explanation: REITS are required to have a minimum of 75% of their asset invested in real estate and must derive at least 75% of their gross income from rents or mortgages. Except q Textbook Reference: Please see textbook section 5.1.1

All of the following statements about the structure of a REIT are true EXCEPT A) REITS must have a minimum of 90% of their total assets invested in real estate B) REITs must be jointly owned by a minimum of 100 persons C) REITS must be set up as a corporation D) REITS must have transferable interests Answer Explanation:

C) the stockholder must surrender the preferred when called or lose the right to par value Answer Explanation: The advantage of convertible preferred stock is the opportunity to participate in any appreciation in the value of the common stock. In return for this potential benefit, the preferred pays a lower rate than nonconvertible preferred. Stockholders are always required to surrender the stock when it is called, but they will usually be paid a premium over par value. Additionally, dividends cease on the call date. Note that this is an "except" question. Textbook Reference: See textbook section 1.5.2

All of the following statements are true of a callable convertible preferred issue EXCEPT that A) the convertible preferred can increase in price because of the underlying security B) the convertible is issued with a lower stated dividend rate than a nonconvertible preferred C) the stockholder must surrender the preferred when called or lose the right to par value D) dividend payments stop after the preferred is called

C) A reduction in vacancy rates Answer Explanation: A reduction in vacancy rates means that there is a lower supply of available buildings. When the supply is reduced, there is greater demand, which drives the price up. A reduction in vacancy rates would be likely to cause the share of a REIT to trade at a premium. Declining demand for space, declining property values, and decreasing demand for REIT shares would all be likely to cause REIT shares to trade at a discount. Textbook Reference: Please see textbook section 5.1.2

All of the following would likely cause a share of a REIT to trade at a discount EXCEPT A) A decrease in demand for new space B) A decline in property values C) A reduction in vacancy rates D) A decrease in the demand for the shares of the REIT

C) Is not listed on a national securities exchange in the U.S Answer Explanation: The main requirements for ADRs to be quoted on the OTCBB are SEC registration and no listing on a national U.S. exchange. However, if the ADR is listed on a national exchange but does not qualify for dissemination of transaction reports on the Consolidated Tape, it still may be quoted. Textbook Reference: Please see textbook section 9.3.4.1

An American Depository Receipt (ADR) may be quoted on the OTCBB if it is registered with the SEC and A) Does not exceed a maximum public share float B) Does not exceed a maximum average daily trading volume C) Is not listed on a national securities exchange in the U.S. D) Is not listed on a major securities exchange in the U.S. or abroad

D) business risk. Answer Explanation: Non-systematic risk or business risk is the risk inherent in individual stocks or companies. Changes in corporate management or product recalls, which could impact a single stock, are examples. Textbook Reference: Please see textbook section 7.2.12

An airline is involved in a scandal of covering up defects that caused its planes to crash. As a result, the stock price plummets. This is an example of A) political risk. B) systematic risk. C) outlier risk. D) business risk.

C) equity owner in the business. Answer Explanation: An individual having a financial interest in a limited partnership is considered to have an equity interest in the business. Textbook Reference: Please see textbook section 5.2.1

An individual has made an investment in a limited partnership. This individual is deemed to be a(n) A) secured creditor in the business. B) senior subordinated lender to the business. C) equity owner in the business. D) junior subordinated lender to the business.

B) pump and dump. Answer Explanation: Pump and dump is a scheme that intends to raise the price of a stock by giving recommendations based on false or misleading information, the goal for the trader being to sell their shares at a higher price and earn a profit. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes. Textbook Reference: Please see textbook section 9.5.10

An individual holding a position in a security might attempt to raise the price of that security through recommendations based on misleading statements in an attempt to gain a profit through a process known as A) insider trading. B) pump and dump. C) spoofing. D) interpositioning.

A) A stockholder Answer Explanation: As a common stockholder, an individual would be entitled to receive financial reports directly from the corporation. Textbook Reference: Please see textbook section 1.1.1.3

An individual would receive an annual report of a corporation's recent results if they are A) A stockholder B) An attorney C) A creditor D) A bondholder

D) II and IV This is a secondary market transaction. Since a commission is charged, the trade was completed on an agency basis. Textbook Reference: Please see textbook section 9.2.1.2

An insurance company sells municipal bonds through a bank and pays commission on the transaction. This is a I. Primary market transaction II. Secondary market transaction III. Principal transaction IV. Agency Transaction A) II and III B) I and III C) I and IV D) II and IV

D) The price will decrease towards par. Answer Explanation: This bond has a coupon of 8.0% and a yield-to-maturity of 7.0%, indicating that the bond is trading at a premium. The price of a bond will always trend towards par as maturity approaches. Given that this bond is trading at a premium (e.g. 105% of par), the price would need to decrease to arrive at par value. Textbook Reference: Please see textbook section 2.1.8

An investor buys an 8.0% coupon bond to yield 7.0%. What will most likely happen to the price of the bond as maturity approaches? A) The price will remain constant. B) The price will increase towards par. C) The price will fall to zero. D) The price will decrease towards par.

C) Mutual fund Answer Explanation: A summary prospectus is used for a mutual fund purchase. This is an abbreviated version of the full (statutory) prospectus, which provides key information about the fund such as its investment objectives and goals, as well as its sales charges and expense ratio. The statutory prospectus must be available on request. Textbook Reference: Please see textbook section 4.2.1

An investor has received a summary prospectus from his registered representative. What security has the customer purchased? A) Variable annuity B) Real Estate Investment Trust (REIT) C) Mutual fund D) Direct participation program (DPP)

B) A type of MBS designed by a broker-dealer Answer Explanation: A CMO is mortgage-backed security, structured by a broker-dealer, divided into individual components called 'tranches'. Textbook Reference: Please see textbook section 3.3.2

An investor holding a Collateralized Mortgage Obligation (CMO) owns A) A US Government guaranteed bond B) A type of MBS designed by a broker-dealer C) A stock portfolio secured by a pool of mortgages D) A bond portfolio secured by a pool of housing stocks

C) reinvestment risk Answer Explanation: Issuers call bonds when interest rates decline, so they can refinance their debt at a lower rate. An investor who has a bond called away is subject to reinvestment risk, because the investor may have difficulty finding as good a deal for the money. Textbook Reference: Please see textbook section 2.3.3

An investor holds a callable bond that has been called by the issuer. This investor now faces A) interest rate risk B) call risk C) reinvestment risk D) credit risk

B) capital appreciation Answer Explanation: The investment objective of this investor is likely capital appreciation. Since the land is not developed, there will be no income, nor depreciation available on the land. Raw land cannot be depreciated. Textbook Reference: Please see textbook section 5.2.5

An investor is a participant in a raw land limited partnership. The likely investment objective of this individual is A) growth and income B) capital appreciation C) capital preservation D) tax-free income

B) Size of the fund Answer Explanation: The size of a particular fund is the least important factor amongst these items when choosing an appropriate mutual fund investment. Textbook Reference: Please see textbook section 4.2.4.1

An investor may consider which of the following factors least important when choosing a mutual fund to invest in? A) Investment policies B) Size of the fund C) Investment objectives D) Fees

A) Zero coupon bond Answer Explanation: Of these choices, a zero coupon bond can assure that a fixed amount of money is available at a particular time. Zero coupon bonds are purchased at a deep discount and mature to their face amount. They are well suited for planning for long-range goals, such as a child's education. Though a treasury bond is also a safe investment, the investor does not need the semi-annual coupon that it offers. Textbook Reference: Please see textbook section 2.1.5

An investor wishes to establish a college education fund for his son who is 3 years old. He is interested in ensuring that $100,000 will be available when the child reaches age 18. An instrument that may be well suited to meeting these objectives is (a) A) Zero coupon bond B) Treasury Bond C) AAA corporate bond D) Blue chip common stock Answer Explanation: Of these choices, a zero coupon bond can assure that a fixed amount of money is available at a particular time. Zero coupon bonds are purchased at a deep discount and mature to their face amount. They are well suited for planning for long-range goals, such as a child's education. Though a treasury bond is also a safe investment, the investor does not need the semi-annual coupon that it offers.

A) may sell securities only to residents of that state Answer Explanation: Rule 147 permits intrastate issuers to sell securities without registration with the SEC to residents of that state. The securities must be held for 6 months before they can be sold to non-state residents. Textbook Reference: Please see textbook section 8.2.2

An issuer intending to distribute securities under Rule 147 A) may sell securities only to residents of that state B) must file an offering notice with FINRA no later than 2 business days prior to distribution C) must deliver a prospectus to investors for disclosure D) can sell no more than $5 million without a full registration statement

A) a high coupon and no call premium when interest rates are falling Answer Explanation: Issuers strive to keep their cost of borrowing as low as possible. To do this, they call bonds with high coupons when rates are have fallen. They can then issue new bonds at a lower rate and reduce borrowing costs. A call premium is an additional amount that must be paid to call the bonds. To keep costs as low as possible, the issuer would prefer to call a bond with no call premium. Textbook Reference: Please see textbook section 2.1.9

An issuer is most likely to call a bond which has A) a high coupon and no call premium when interest rates are falling B) a low coupon and a call premium when interest rates are rising C) a low coupon and no call premium when interest rates are rising D) a high coupon and a call premium when interest rates are falling

A) at which the market maker or broker-dealer is willing to buy or sell. Answer Explanation: Any quote must be entered at prices at which the market maker or brokerdealer is willing to buy or sell. Textbook Reference: Please see textbook section 9.3.3

Any quotes entered by a market maker or broker-dealer must represent prices A) at which the market maker or broker-dealer is willing to buy or sell. B) that are competitive with the current market. C) that are not more than 10% away from the NBBO. D) at which a prudent person would be willing to buy or sell.

B) II, I, IV, III

Arrange the steps that are followed in the liquidation of a limited partnership from first to last. I. General creditors are paid II. Secured claims are paid III. General partners receive their share of profits and contributed capital IV. Limited partners receive their share of profits and contributed capital A) I, II, III, IV B) II, I, IV, III C) IV, III, II, I D) II, I, III, IV

B) Decreases Answer Explanation: As the market interest rate increases, a bond's price decreases because newly issued bonds pay a more attractive yield. Textbook Reference: Please see textbook section 2.3.1

As interest rates increase, a bond's price does which of the following? A) Remains neutral B) Decreases C) Defaults D) Increases

A) outstanding shares will decrease. Answer Explanation: Treasury stock represents shares that have been repurchased by the company. As the number of Treasury shares increase, outstanding shares will decline. Textbook Reference: Please see textbook section 1.1

As the number of Treasury shares increase, the company's A) outstanding shares will decrease. B) profits will increase. C) revenues will tend to fall. D) outstanding shares will increase.

B) 1030 Answer Explanation: At maturity, a corporate bondholder will receive the face amount, or par value of the bond ($1000), plus the remaining semi-annual interest payment. A bond with a coupon of 6% pays $60 of interest per year, or $30 semi-annually. $1000 + $30 = $1030. Textbook Reference: Please see textbook section 2.1.4

At maturity, an investor who holds a 6% bond issued by ABC Corporation will receive A) 1060 B) 1030 C) 103 D) 106 Answer Explanation: At maturity, a corporate bondholder will receive the face amount, or par value of the bond ($1000), plus the remaining semi-annual interest payment. A bond with a coupon of 6% pays $60 of interest per year, or $30 semi-annually. $1000 + $30 = $1030. Textbook Reference: Please see textbook section 2.1.4

A) It isn't known Answer Explanation: The stop order will convert into a market order when any shares of Time Warner sell at $11. However, there is no guarantee of the next-sale price. It probably will be about $11 but it could be lower. This is a vulnerability of both market and stop orders. Textbook Reference: Please see textbook section 9.4.4

Cleo wants to make sure she gets a good price when she sells her 400 shares of Time Warner stock. If she enters a stop order to sell the shares at $11, what is the worst price she can get? A) It isn't known B) $10.99 C) $11 D) $10

C) a falling stock price. Answer Explanation: Stabilization allows the underwriter to bid on a new issue in the secondary market to prevent a decline in price. Textbook Reference: Please see textbook section 8.3.7

During the post-effective period for an IPO, the main concern that may cause underwriters to engage in stabilization is A) the issuer's need to receive more proceeds from the deal. B) a rising stock price. C) a falling stock price. D) not enough shares available to meet demand.

D) prepayment risk.

Falling interest rates can create additional risk for holders of mortgage-backed securities (MBS) because homeowners can refinance into lower-rate mortgages. This risk is called A) capital risk. B) credit risk. C) mortgage acceleration risk. D) prepayment risk.

C) On the filing date The filing date is when the issuer or lead underwriter delivers the registration to the SEC. The minimum cooling-off period is 20 days. Textbook Reference: Please see textbook section 8.1.2

For a public offering of securities, when does the cooling-off period begin? A) On the effective date B) 20 days after the effective date C) On the filing date D) 20 days after the filing date

C) Negotiable Answer Explanation: Negotiable CDs, which generally are sold to institutions in large denominations, often have multi-year maturities and are priced like bonds on secondary markets. Prices rise when interest rates decline and fall when interest rates increase. But they always pay face value at maturity date. Textbook Reference: Please see textbook section 3.6.2.2

For which type of certificate of deposit (CD) do resale prices rise and fall with changes in interest rates? A) Callable B) Breakable C) Negotiable D) Jumbo

C) ETF Answer Explanation: An exchange traded fund (ETF) is an investment company product that will typically have lower expenses than a traditional mutual fund, and may be purchased and sold throughout the trading day. Textbook Reference: Please see textbook section 4.5.2

Gail is seeking an investment company product with low operating expenses that she can trade any time during the day. You might suggest that she consider a (an) A) CMO B) DPP C) ETF D) Variable annuity

A) 1200 Answer Explanation: Security holders are prohibited from tendering more shares in a tender offer than they hold net long. In this case, the holder is net long 1,200 shares (2,000 long - 800 short.) Textbook Reference: Please see textbook section 8.2.6.1

Grace owns 2,000 shares of ABC Corporation common stock long and she is short 800 shares of the same stock. She holds no "equivalent securities." What is the maximum number of shares she can tender, in response to a tender offer? A) 1200 B) 2000 C) None D) 800

B) One

How many market makers, at minimum, are required for a security to be quoted on the OTCBB? A) Three B) One C) Four D) Two

C) Investors must receive an official statement no later than the settlement of the transaction When municipal securities firms market LGIP securities, they are required to provide an official statement for disclosure no later than the settlement date. This statement is often called an Information Statement, but delivery is not required until the settlement date, not the trade date. The prospectus delivery requirement applies to corporate securities. Textbook Reference: Please see textbook section 5.6.1.3

If a municipal securities firm markets LGIP securities to potential customers, which of the following statements is TRUE? A) There is no specific disclosure document required because purchasers of these securities are institutional and sophisticated investors B) Investors must receive a prospectus no later than the settlement of the transaction C) Investors must receive an official statement no later than the settlement of the transaction D) Investors must receive an Information Statement no later than the date the trade is made

C) is acting as an agent and carries no responsibility for unsold shares.

In a best efforts underwriting arrangement, the underwriter A) is acting as a principal and is responsible for any unsold shares. B) is acting as a fiduciary and is required to purchase for its own account any shares it is unable to sell to the public. C) is acting as an agent and carries no responsibility for unsold shares. D) is required to sell a minimum quantity of shares , as stipulated in the underwriting agreement.

A) the difference between the sale price and higher repurchase price. Answer Explanation: A repo is a contractual agreement between two parties, in which securities are sold and then later repurchased at a higher price. The difference in price is interest to the lender. Textbook Reference: Please see textbook section 3.6.4

In a repurchase agreement (repo), the interest amount is calculated as A) the difference between the sale price and higher repurchase price. B) a fixed percentage of the purchase price. C) a flat dollar amount, quoted at the time or repurchase. D) a variable percentage of the purchase price, tied to T-bill rates.

A) commission received Answer Explanation: In an agency transaction, the commission paid by the customer to the broker-dealer must be disclosed. In a principal transaction, it is the difference between the price charged to the customer and the prevailing market price charged by a market maker who works in an active and competitive market Textbook Reference: Please see textbook section 9.2.1.2

In an agency transaction for a penny stock, the amount of compensation disclosed is the A) commission received B) difference between price charged and the average of two or more market maker's prices C) difference between price charged and prevailing market price D) rebate paid by the issuer

A) Risk-sharing Answer Explanation: Syndication helps to spread the risk of an offering among all investment banks participating in the syndicate. This is especially important in firmcommitment offerings, in which investment bankers bear the risk for any unsold securities. Textbook Reference: Please see textbook section 8.3.3

In firm-commitment public securities offerings, what is the main advantage of the syndication process to investment bankers? A) Risk-sharing B) Regulatory compliance C) Increased profit D) Ability to sell securities across state lines

A) Coincident Answer Explanation: Manufacturing sales is a coincident indicator. Coincident indicators provide a snapshot of the economy's current level of health. Textbook Reference: Please see textbook section 10.1.4.3

Manufacturing sales is what kind of economic indicator? A) Coincident B) Lagging C) Leading D) Coterminous

B) Refunding Answer Explanation: A refunding is a refinancing strategy that an issuer might utilize when interest rates have declined following the issuance of a bond. The issuer would sell a new bond at the new lower rates and use the proceeds of the sale to redeem the outstanding bonds which are carrying a higher interest rate. The end result is lower financing costs for the issuer. Textbook Reference: Please see textbook section 2.1.9

Market interest rates have declined since ABC Co. issued a $100,000,000 debenture. To benefit from the change in interest rates, ABC might consider a A) Leveraged buy out B) Refunding C) Reorganization D) Repurchase agreement

C) their units trade actively on stock exchanges. Answer Explanation: MLPs have a limited partnership structure but their units trade actively on stock exchanges. They help investors participate in several industries including oil and gas drilling, energy distribution and storage, and shipping facilities. Textbook Reference: Please see textbook section 5.2.6

Master Limited Partnerships (MLPs) have a limited partnership structure. But unlike other limited partnerships A) their distributions are not taxable. B) they have superior tax advantages. C) their units trade actively on stock exchanges. D) they have no general partner.

A) Interest income potentially taxable at the state level but not the federal level Answer Explanation: Most municipal bonds pay interest that is exempt from federal income taxes, but may be taxable at the state level, depending on the state of residence of the investor, and from what state the bond is issued from. Textbook Reference: Please see textbook section 3.4.5

Municipal bonds offer investors A) Interest income potentially taxable at the state level but not the federal level B) Triple tax free income for all investors C) Higher returns than most corporate bonds, owing to their fully taxable interest income D) Interest income taxable at the federal level but not the state level

A) their potential lack of liquidity. Answer Explanation: Penny stocks, or stocks priced below $5 per share that do not trade on an exchange, are frequently thinly traded, which means that there may be no market for the stock if customers want to liquidate their positions. Because of this market risk additional disclosure must be made to all buyers of penny stock. Textbook Reference: Please see textbook section 1.2.2

Penny stocks present added risk to customers because of A) their potential lack of liquidity. B) their high surrender charges. C) their low potential for return. D) their potential for exposure to adverse tax consequences.

D) II only Answer Explanation: Preferred stock pays dividends if declared by the Board of Directors. Preferred stock generally does not have voting rights. While it has priority over common stock in the event of a corporate liquidation, it does not have priority over corporate debt, including debentures. Textbook Reference: Please see textbook section 1.5.1

Preferred stock includes which of the following features? I. Voting rights II. Dividends if declared by the Board of Directors III. Priority over debentures in a corporate liquidation A) III only B) I, II and III C) I only D) II only

D) the registrar. Answer Explanation: The registrar maintains records of ownership by matching each share of stock against an ownership record. The registrar also makes sure there is no unauthorized stock issuance. Textbook Reference: Please see textbook section 1.6.1

Public corporations must make sure that their stock ownership records are accurate by matching each share of stock with an owner. This task is performed by A) the bank of record. B) the transfer agent. C) the corporate secretary. D) the registrar.

C) The Securities Act of 1933 Answer Explanation: The Securities Act of 1933 includes anti-fraud and anti-manipulation rules that apply to primary market transactions. Neither exempt nor nonexempt securities are excluded from the anti-fraud provisions of the Acts of 1933 or 1934.

Rules against anti-manipulation in the primary market sale of exempt securities are addressed in A) The Investment Company Act of 1940 B) The Glass Steagall Act C) The Securities Act of 1933 D) The Securities Exchange Act of 1934

B) restricted securities Answer Explanation: Under Rule 144, shares acquired via a private transaction directly from the spouse of an affiliate are considered restricted securities if the spouse shares the same home as the affiliate. Textbook Reference: Please see textbook section 8.2.4.1

Shares acquired from the spouse of an affiliate in a private placement would be considered A) an illegal transfer B) restricted securities C) immediately saleable D) non-affiliated securities Answer Explanation: Under Rule 144, shares acquired via a private transaction directly from the spouse of an affiliate are considered restricted securities if the spouse shares the same home as the affiliate. Textbook Reference: Please see textbook section 8.2.4.1

A) on the ex-dividend date

The NAV of a mutual fund share will decrease by the amount of the dividend A) on the ex-dividend date. B) on the payable date. C) when announced by the board of directors of the fund. D) at the start of trading on the morning the dividend is announced.

B) MBS investors must reinvest principal in a lower interest rate environment. Answer Explanation: Homeowners tend to refinance (pay down) their mortgages in falling rate environments. This increases prepayment risk as principal is returned to MBS investors faster than expected. This principal must be reinvested in a lower-rate environment. Textbook Reference: Please see textbook section 7.2.7

The downside of increased prepayment risk in mortgage-backed securities (MBS) is that A) MBS investors lose principal. B) MBS investors must reinvest principal in a lower interest rate environment. C) MBS investors lose liquidity. D) MBS securities have their credit ratings downgraded.

D) All of the above cases and for all types of securities Answer Explanation: The fraud provisions of the act of 1934 apply to all persons and for all types of securities. No person or transaction is ever exempt from the antifraud provisions of the Securities Act of 1934. Textbook Reference: See textbook section 9.1

The fraud provisions of the Securities Exchange Act of 1934 apply to which of the following? A) Manipulation of the price of a municipal security B) Participation in an all-or-none offering and reporting the offering as firm to the client C) Short sale of municipal security serial bonds D) All of the above cases and for all types of securities

D) $1,000.00 Answer Explanation: Most corporate bonds have a par value of $1,000. For exam purposes, assume a par value of $1,000 for bonds. Textbook Reference: Please see textbook section 2.1.2

The most common par value for corporate bonds is A) $500.00 B) $10,000.00 C) $50,000.00 D) $1,000.00

D) dividends are typically paid as a percentage of par value. Answer Explanation: The main attraction of preferred stock is steady dividends, which are quoted as a percentage of par value. Par value does not, however, indicate the market value of shares. Textbook Reference: Please see textbook section 1.5.3

The par value of preferred stock is important to know as A) the shares may be sold on the open market at par value. B) par value represents the net asset value of the shares for redemption purposes. C) the interest rate is quoted at a spread to par value. D) dividends are typically paid as a percentage of par value.

C) Blue chip common stock Answer Explanation: Money market funds are comprised of short-term, safe and liquid debt securities. Equity securities are not included in these portfolios. Longterm debt securities like T-bond are included if they mature within one year. Textbook Reference: Please see textbook section 3.6

The portfolio of a money market fund is likely to contain all of the following EXCEPT A) T - bills B) Repurchase agreements C) Blue chip common stock D) T-bonds that mature within one year

A) Public offering price Answer Explanation: Mutual fund shares are sold to the public at the POP (public offering price). The sales charge is added to the net asset value to arrive at the POP. Textbook Reference: Please see textbook section 4.2.5.1

The price at which a fund sponsor sells mutual fund shares to the public is the A) Public offering price B) Net asset value plus commission C) Net asset value D) Public offering price plus commission

D) A Capital gain

The sale of an asset at a price higher than its purchase price is A) Capital appreciation B) A Capital sale C) A Capital loss D) A Capital gain

D) Issued stock Answer Explanation: Issued stock are the authorized shares of a corporation that have been sold to the public. Textbook Reference: Please see textbook section 1.1

The shares of authorized stock that are sold to the public are known as A) Redeemed shares B) Treasury stock C) Preferred stock D) Issued stock

B) 1-2% of the assets under management Answer Explanation: Hedge fund managers generally charge a management fee of 1-2% of the assets under management plus 20% of the fund's profits. Textbook Reference: Please see textbook section 5.3

The typical asset management fee charged by a hedge fund manager is A) 20% of the assets under management B) 1-2% of the assets under management C) 10% of the assets under management D) 5% of the assets under management

C) They qualify as accredited investors on the basis of their net worth Answer Explanation: Regulation D defines "accredited investors" as individuals with a net worth of at least $1 million at the time of purchase; or individuals with single income of more than $200,000 or joint income (with a spouse) of more than $300,000, in each of the two most recent years. The individual may meet either the asset or income test. In this case, the asset test is met, but not the income test. Textbook Reference: Please see textbook section 8.2.3

Tom and Betty are a married couple with combined net worth $1.2 million in and $200,000 in steady annual income. They want to invest in a private limited partnership. Which of the following is TRUE about their status, under the SEC's Regulation D? A) They may qualify as accredited investors individually, but not as a couple. B) They do not qualify as accredited investors C) They qualify as accredited investors on the basis of their net worth D) They qualify as accredited investors on the basis of their income

D) I and IV Answer Explanation: When the Federal Open Markets Committee (FOMC) purchases U.S. Treasury securities, the money supply increases. Because of an increase in the supply of money, interest rates will decline. Textbook Reference: Please see textbook section 10.3.3.2

U.S. Treasury Securities are purchased by the Federal Reserve Board. The result of this transaction is that I. Money supply will increase II. Money supply will decrease III. Interest rates will rise IV. Interest rates will fall A) II and III B) II and IV C) I and III D) I and IV

D) the fact that the firm is entitled to a profit Answer Explanation: Commissions charged in agency transactions must be fair and reasonable. In determining fair and reasonable commissions a firm may consider market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service rendered by reason of the firm's experience in and knowledge of such security and the market therefor. When executing trades in an agency basis, however, the commission does not contemplate the fact that the firm is entitled to a profit. Textbook Reference: Please see textbook section 9.2.1.4

Under FINRA's Standards of Commercial Honor and Principles of Trade all of the following may be considered by a firm when charging a commission in an agency transaction, except: A) market conditions with respect to such security at the time of the transaction B) the value of any service rendered by reason of the firm's experience C) the expense of executing the order D) the fact that the firm is entitled to a profit

A) 30 to 180 days Answer Explanation: Maturities of BAs typically fall between 30 and 180 days. Issues usually can be sold in the secondary market at any time prior to maturity. Textbook Reference: Please see textbook section 3.6.3

What are typical maturities in banker's acceptances (BAs)? A) 30 to 180 days B) They don't have fixed maturities C) 180 to 365 days D) 1-2 years

A) It is executed immediately at the best price available Answer Explanation: When the stop price is reached, a stop order converts into a market order. It is immediately filled in full at the best available price(s). Textbook Reference: Please see textbook section 9.4.4

What happens to a stop order when the order price is reached? A) It is executed immediately at the best price available B) It becomes a limit order at that price C) It is executed immediately at that same price D) It is executed within 10 minutes at the best price available Answer Explanation: When the stop price is reached, a stop order converts into a market order. It is immediately filled in full at the best available price(s). Textbook Reference: Please see textbook section 9.4.4

B) 9% Answer Explanation: Nominal yield, AKA the coupon, is calculated as the sum of annual coupon (interest) payments divided by the face amount of the bond. Two coupons of $45 each = $90; $90 divided by $1,000 face value = 9%. The current yield is calculated using the market price of the bond. The current yield for this bond is 10% ($90/$900). Textbook Reference: Please see textbook section 2.2.1

What is the nominal yield on a bond that is trading for $900, with a face value of $1,000, and pays two coupons per year of $45 each? A) 4.5% B) 9% C) 10% D) 6%

C) Red herring Answer Explanation: The preliminary prospectus, also known as a red herring, may be delivered to potential purchasers of the offering during the cooling-off period. Indications of interest may be taken, but no sales may be made until the effective date. Textbook Reference: Please see textbook section 8.1.2

What type of prospectus may investment bankers use to inform brokers and investors during the cooling-off period, while public offerings are awaiting clearance by the SEC? A) Greenmail B) Green shoe C) Red herring D) White knight

A) There will be no change in nominal yield. Answer Explanation: Nominal yield is the bonds annual interest or coupon rate. It is a percentage of par value and fixed over the life of the bond. Textbook Reference: Please see textbook section 2.2.1

When a bond's market price increases, what is the impact on its nominal yield? A) There will be no change in nominal yield. B) Nominal yield will increase. C) There will be increased volatility in the nominal yield. D) Nominal yield will decline.

A) credit ratings of the two bonds Answer Explanation: The credit ratings of the bonds would be the most important factor to examine when comparing the liquidity differences of two corporate bonds. Textbook Reference: Please see textbook section 3.1.5

When comparing liquidity differences between two corporate bonds, the most important factor to be considered is the A) credit ratings of the two bonds B) maturity of the two bonds C) coupons of the two bonds D) CUSIP number

C) During the cooling-off period Answer Explanation: The cooling-off period begins once the issuer files the registration statement with the SEC. During the cooling-off period, the underwriters can market the securities to investors, including via road shows. Textbook Reference: Please see textbook section 8.1.4

When does the road show take place? A) During the pre-registration period B) During the active solicitation period C) During the cooling-off period D) During the post-effective period

A) Bonds with lower coupons and longer maturities Answer Explanation: Bonds having lower coupons and longer maturities will most be impacted by interest rate changes. Textbook Reference: Please see textbook section 2.3.1

When interest rates change, which of the following bonds will be impacted the most? A) Bonds with lower coupons and longer maturities B) Bonds with higher coupons and shorter maturities C) Bonds with higher coupons and longer maturities D) Bonds with lower coupons and shorter maturities

B) Whether or not the issuer reports financial information to the SEC Answer Explanation: Companies that report financial information to the SEC are considered public companies. Securities acquired through private placements are restricted or control securities. If these securities are issued by a public company the minimum holding period until resale is six months. Otherwise, it is 12 months. Textbook Reference: Please see textbook section 8.2.4.1

When securities are purchased by investors in a Regulation D private placement, what determines the required holding period, before they can be sold? A) The size of the issuer B) Whether or not the issuer reports financial information to the SEC C) The size of the private placement D) Whether or not the offering is an IPO

C) It is a measure of how much a bond's price will change when interest rates fluctuate. Answer Explanation: Duration is a commonly used method of gauging a bond's sensitivity to changing interest rates. Textbook Reference: Please see textbook section 2.3.1

Which of the following best describes duration? A) It is the length of time between call dates or interest payment dates on a bond. B) It is a measure of how the Treasury yield curve will adjust when general interest rates change. C) It is a measure of how much a bond's price will change when interest rates fluctuate. D) It is the length of time that a bond remains outstanding prior to it being called or redeemed by the issuer.

B) 0.0009 Answer Explanation: It is important to note that this answer is as a pecentage. One basis point is equal to .01%, or .0001. There are 100 basis points in 1%. To convert basis points to a percentage, move the decimal two places to the left. To convert basis points to a decimal, move the decimal point four places to the left. So, 9 basis points becomes .09%, or 0.0009. Textbook Reference: Please see textbook section 2.1.7

Which of the following is equal to 9 basis points? A) 0.009 B) 0.0009 C) 0.000009 D) 0.0000009

D) The Official Statement Answer Explanation: The Official Statement contains the most complete financial information about the issuer, and a detailed description of the municipal issue. Textbook Reference: Please see textbook section 8.4.3

Which of the following is the best source of financial information about an issuer for potential investors? A) The underwriting agreement B) The Official Notice of Sale C) The legal opinion D) The Official Statement

B) They act as agents on the deal. Answer Explanation: Selling group members are additional securities firms that act as agents, assisting in selling the new issue. Unlike other syndicate members, the selling group has no liability for any unsold securities. Therefore, because the selling group takes on no risk they are compensated least in the syndicate. The most they can earn is the selling concession for each bond that they sell. Textbook Reference: Please see textbook section 8.3.4.2

Which of the following is true about the selling group? A) They have liability for unsold securities. B) They act as agents on the deal. C) The compensation they receive is known as the total takedown. D) They receive the greatest compensation in the syndicate.

D) The right of the firm to make a profit Other pricing factors, beyond the 5% policy, should be considered, including the security price and availability and dollar size of the transaction. The broker-dealer's profitability or profit targets may not be used as a pricing factor when trading in an agency capacity. Textbook Reference: Please see textbook section 9.2.1.4

Which of the following may not be used as a factor in determining a fair price when a broker dealer is trading in an agency capacity? A) Dollar size of the transaction B) Price of the security C) Security availability D) The right of the firm to make a profit

C) I, II and III The OTC market is a decentralized market connecting to broker-dealers electronically. It is a negotiated market place where various market makers enter bids and asks and facilitates the trading of stock not listed on an exchange. Textbook Reference: Please see textbook section 9.3.4.1

Which of the following statements are true regarding the OTC market? I. It facilitates the trading of stock not listed on an exchange II. It is a connection of broker-dealers via computers III. There can be more than one market maker in a security A) I and III only B) I and II only C) I, II and III D) II and III only

B) An order in which all members of the syndicate share in the profit according to their participation There are four types of orders that can be placed with a syndicate. A group order is for the benefit of all members of the syndicate, and proceeds are shared equally among all members of the syndicate. Presale orders are entered before the syndicate wins the bid. Designated orders are usually entered by institutions that identify a member or members of the syndicate to receive the credits. Member orders are placed by a single firm for its own inventory or to fill orders of its customers. Textbook Reference: Please see textbook section 8.4.1.1

Which of the following statements describes a group net order for a new issue of municipal securities? A) An order placed by a member firm for its customers B) An order in which all members of the syndicate share in the profit according to their participation C) An order placed before the syndicate actually purchases the issue from the issuer D) An order from a large institution in which designates two or more members to receive credit for the sale

C) They have a minimum purchase amount of $100 Answer Explanation: $100 is the minimum purchase amount for U.S. Treasury Notes, which are medium term Treasury securities. They mature in the range of two to ten years, and yield a steady stream of interest payments, payable every 6 months. They are generally issued at par and trade actively in the overthe- counter market.

Which of the following statements is true of Treasury Notes? A) They are the shortest maturity of U.S. government securities B) They cannot be traded in the secondary market C) They have a minimum purchase amount of $100 D) They are issued at a discount and mature to face value

B) Common stock Answer Explanation: In a corporate default, preferred stock holders usually have a priority claim over common stock holders. However, preferred dividends are not guaranteed, and the claims of preferred stock holders may fall below all debt holders of the issuer. Textbook Reference: Please see textbook section 3.1.2.3

Which of the following types of securities does preferred stock outrank, in the corporate capital structure? A) Junior debt B) Common stock C) Mezzanine debt D) Senior secured debt

D) I and IV Answer Explanation: The homebuilding and steel sectors are deeply cyclical, meaning their companies' revenue and earnings are subject to high volatility depending on where they are in the cycle. Consumer products and healthcare services companies tend to be much more stable and less cyclical due to the nature of their end markets. Textbook Reference: Please see textbook section 10.2.5.1

Which two of the following are considered deep cyclical sectors? I. Homebuilding II. Consumer product III.Healthcare services IV. Steel A) II and IV B) I and III C) II and III D) I and IV

A) I and IV Answer Explanation: Treasury bills are unique from notes and bonds because they are purchased at a discount from their face value. The interest is the difference between the price paid to purchase the bill and the face amount received at maturity. Treasury notes and bonds typically pay interest semi-annually. Textbook Reference: Please see textbook section 3.2.3

Which two of the following statements are true regarding quotations of government securities? I. Treasury bills are quoted at a discount from their face value II. Treasury notes and bonds are quoted at a discount from their face value III. Treasury bills typically pay interest every 6 months IV. Treasury notes and bonds typically pay interest every 6 months. A) I and IV B) II and IV C) I and III D) II and III

A) I and III Closed-end funds are actually considered a type of ETF by some. These are both classified as closed-end investment companies because they have a stable pool of capital that is raised through their initial public offering. Textbook Reference: Please see textbook section 4.6

Which two statements correctly compare ETFs and closed-end funds? I. Both are investment company products II. Closed-end funds are investment company products; ETFs are not III. Both have a stable pool of capital IV. Closed-end funds have a stable pool of capital; ETFs offer shares continuously A) I and III B) I and IV C) II and III D) II and IV

A) No-load No-load funds are sold at net asset value. That means that the fund does not charge a sales charge above the net asset value and investors can purchase shares at the NAV Textbook Reference: Please see textbook section 4.2.5.3

Which type of mutual fund is sold at net asset value? A) No-load B) Open-end C) Front-end load D) Closed-end

C) may be called any time after 12 years Answer Explanation: This bond may be called any time after year 12. Textbook Reference: Please see textbook section 2.1.9

XYZ Corporation issued a 25-year bond, callable after 12 years. This means that the bond A) must be called in year 12. B) may be called in year 12 or 25. C) may be called any time after 12 years D) must be called after 12 years.