Series 7 Review
A customer will be taking a six-month trip to a foreign country and will not have access to her mail. If the customer provides written instructions and includes a valid reason:
A broker-dealer may hold mail for a customer who will not be receiving mail at his usual address provided the firm receives written instructions from the customer that include the time-period during which the mail is to be held. If the period exceeds three consecutive months, the customer's instructions must also include a valid reason for the request.
A corporation wishes to open a cash account. Which of the following documents is required?
A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account.
A customer enters a stop order to sell 1,000 shares of ATT at 35. The order will be executed at: 35 34.99 or below The next trade after 35 is touched 35.01 or above Explanation: Incorrect. Stop orders become market orders once they are activated. After the order is activated at or below 35, the next trade will be the execution price.
A customer enters a stop order to sell 1,000 shares of ATT at 35. The order will be executed at: 35 34.99 or below The next trade after 35 is touched 35.01 or above Explanation: Incorrect. Stop orders become market orders once they are activated. After the order is activated at or below 35, the next trade will be the execution price.
A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase: The IPO from a different broker-dealer The IPO from the RR's broker-dealer Only a limited quantity of the IPO from any broker-dealer The IPO but only from a member of the selling group
A restricted person is not permitted to purchase any shares of a new issue unless an exemption applies. There is no exemption for restricted persons to purchase limited quantities of an IPO. An immediate family member of an employee (an RR) of a member firm may be a restricted person. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. An exception exists if a nonsupported, immediate family member buys the IPO from a different broker-dealer. There is no requirement to purchase the shares only from a selling group member.
An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what is the client's cost basis per share? $63.25 $55.00 $47.83 $47.75
A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares).
A client wants all trade confirmations sent to his investment adviser. This will require:
A written letter from the client
A registered representative receives an order from the president of XYZ Corporation to sell unregistered XYZ shares. The client purchased the shares in a private placement 90 days ago. This order: Will require the filing of Form 144 with the SEC May be executed without any restrictions Must be approved by a principal prior to execution Is a violation of Rule 144 if executed
According to Rule 144, an affiliated person (e.g., the president of a company) must hold unregistered (restricted) stock for at least six months before it may be sold. Since the president of XYZ Corporation owned the stock for only 90 days, the order to sell violates Rule 144, if executed.
A client has a margin account with a long market value of $950,000 and a debit balance of $550,000. If the broker-dealer declares bankruptcy, which TWO of the following statements are TRUE?
According to SIPC, if a client has a margin account, the net equity is covered (the long market value minus the debit balance). In this example, the client is covered for $400,000 of securities. A client is also permitted (but not required) to pay off the debit balance and receive the full value of the securities. If the client paid $500,000, she would only receive $900,000 of securities.
All of the following descriptions are TRUE about stopping stock on the NYSE, EXCEPT that it: Is permitted only for public orders Requires permission of an exchange official Is done by the designated market maker Will guarantee a price for the order Explanation: Incorrect. Stopping stock is done by the designated market maker (specialist) to guarantee a price for a public order. The designated market maker does not need permission of an exchange official to do so.
All of the following descriptions are TRUE about stopping stock on the NYSE, EXCEPT that it: Is permitted only for public orders Requires permission of an exchange official Is done by the designated market maker Will guarantee a price for the order Explanation: Incorrect. Stopping stock is done by the designated market maker (specialist) to guarantee a price for a public order. The designated market maker does not need permission of an exchange official to do so.
An investor enters an order to buy 400 shares of HRJ @ 56 on the NYSE. Which of the following statements are TRUE regarding this order? The designated market maker may hold this order in his book The order may only be executed at 56 A portion of the 400 shares may be purchased The order must be executed immediately I and III only II and III only II and IV only I, II, III, and IV Explanation: Incorrect. Since a price is specified, it is a limit order. A limit order may be executed at the limit price or better (lower for a buy order). It does not need to be executed at exactly the limit price. A designated market maker is permitted to hold a stop, limit, and stop-limit order. A portion of the order may be executed since the order was not marked AON (all or none). It does not need to be executed immediately since it was not marked IOC (immediate-or-cancel).
An investor enters an order to buy 400 shares of HRJ @ 56 on the NYSE. Which of the following statements are TRUE regarding this order? The designated market maker may hold this order in his book The order may only be executed at 56 A portion of the 400 shares may be purchased The order must be executed immediately I and III only II and III only II and IV only I, II, III, and IV Explanation: Incorrect. Since a price is specified, it is a limit order. A limit order may be executed at the limit price or better (lower for a buy order). It does not need to be executed at exactly the limit price. A designated market maker is permitted to hold a stop, limit, and stop-limit order. A portion of the order may be executed since the order was not marked AON (all or none). It does not need to be executed immediately since it was not marked IOC (immediate-or-cancel).
An equity security that is distributed under Regulation S may be resold by: Immediate sale within the U.S. market Immediate sale in a designated offshore market Regulatory approval from SROs Waiting six months, then selling within the U.S. market
An overseas investor who acquires securities pursuant to Regulation S may sell the securities overseas immediately through a designated offshore securities market. There is a distribution compliance period (holding period) of 40 days for debt securities and a one-year period before an equity security sold pursuant to Regulation S may be resold in the U.S.
In a dispute between a registered representative and his employer, the dispute typically must be settled by
Arbitration
Before accepting a DVP order from a customer, a broker-dealer must:
Before accepting a DVP (delivery versus payment) or RVP (receipt versus payment) order from a customer, a broker-dealer must receive the name of the customer's agent and the customer's account number. The order ticket must be marked DVP or RVP.
Which of the following securities will MOST likely be subject to a withholding tax? An initial public offering (IPO) A real estate investment trust (REIT) A bond issued by a U.S. company that earns income overseas Stock issued by a foreign company that earns income in the U.S.
Choice (d) is an example of an ADR, representing stock issued by a foreign corporation that is traded in the U.S. Dividends paid to a U.S. investor on foreign securities, such as an ADR, may be subject to a withholding tax by the country from which they were paid. If the investor has securities that paid dividends that were subject to a foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest and the amount of tax withheld by the foreign government. The fact that the company earns income in the U.S. is not relevant.
Cash dividends received from which of the following securities will be taxed as ordinary income? Preferred stock issued by a bank Common stock issued by an oil company A real estate investment trust Convertible preferred stock issued by a software company
Currently, dividends paid on both common and preferred stock are taxed at a maximum rate of 20% if the stock is held for more than 60 days. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is not relevant to the tax status of the cash dividend.
Warrants will most likely be issued to:
Debentures may be issued with warrants attached. This allows the corporation to pay a lower interest rate on the debentures.
In order to have an issuer of securities exempt from the provisions of the Securities Act of 1933 under Regulation D, which TWO of the following statements are TRUE? The purchasers must sign an investment letter restricting the resale of the securities The size of the offering must be limited The number of accredited buyers is unlimited The issuer must file an offering document with the SEC I and III I and IV II and III II and IV
Explanation: Incorrect. According to Regulation D, certain conditions must be met for the securities to be exempt from the provisions of the Securities Act of 1933. The offering must be restricted to persons who are knowledgeable and experienced in business and financial matters and who are able to afford the economic risks involved. The issuer must provide the buyer with detailed financial information (this offering document does not need to be filed with the SEC). The number of nonaccredited purchasers must be limited to 35, and the offering must be made in direct negotiations between the issuer and the buyer or his purchaser representative. Also, the buyer must sign an investment letter stating that the purchase was made for investment and not for short-term trading purposes. The size of the offering is not limited and there is no limit as to the number of accredited investors.
If an investor wrote one OEX March 725 put option and the option was exercised when the index was 722.00, the writer is obligated to deliver: 100 shares of the OEX index $300 $72,200 $72,500
Explanation: Incorrect. If a stock index option is exercised against the writer, the writer is obligated to deliver the cash difference between the exercise price and the index value as of the close of trading on that day if the option is in-the-money. The exercise price of the put option is 725 and the lower index value is 722.00. The writer is obligated to deliver the cash difference of $300 Exercise price 725 x $100 = $72,500 Index value 722.00 x $100 = - 72,200 Difference $300
Emily and her sister Lucy have the following accounts at a brokerage firm. Emily has a cash account with $420,000 of securities. Lucy has a margin account with $665,000 of securities and a debit balance of $365,000. A cash account for Emily and Lucy as JTWROS with $290,000 in securities. If the brokerage firm were to go bankrupt, SIPC would provide a maximum of: $500,000 coverage for all the accounts combined $1,000,000 coverage for all the accounts combined $1,010,000 coverage for all the accounts combined $1,210,000 coverage for all the accounts combined
Explanation: Incorrect. SIPC provides protection of $500,000 for each customer (different account title). Since each account has a different title, each would receive coverage of $500,000 of securities. Emily's cash account would receive $420,000 and the joint account would receive $290,000. SIPC will cover Lucy's current equity in a margin account of $300,000. The total coverage is $1,010,000 ($420,000 + $300,000 + $290,000).
There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks is: 1 week ago 25,000 shares 2 weeks ago 26,000 shares 3 weeks ago 27,000 shares 4 weeks ago 28,000 shares 5 weeks ago 27,000 shares 6 weeks ago 27,000 shares According to Rule 144, Mr. Smith would need to file with the SEC a notice of intent to sell which is valid for:
Four weeks 90 days 6 months Whatever amount of time is necessary to complete the offering Explanation: Incorrect. The notice of offering for a Rule 144 sale is valid for 90 days. (73037)
Which TWO of the following securities would be MOST suitable if interest rates are expected to rise? Collateralized Mortgage Obligations A bond with short-term maturities Preferred stock with a fixed dividend Adjustable-rate preferred stock
If interest rates are expected to rise, the most suitable investments would be those that can be reinvested quickly to take advantage of rising rates, or variable or adjustable-rate securities. Bonds with short-term maturities can be reinvested in bonds quickly with higher rates, and the dividend on adjustment-rate preferred stock would increase since the dividend paid is based on LIBOR or another rate that quickly reacts to changing interest rates.
If interest rates increase, which TWO of the following events will most likely occur? Yield-based call premiums will increase Yield-based put premiums will increase Bond prices will rise Bond prices will fall I and III I and IV II and III II and IV Explanation: Incorrect. The value of yield-based options is determined by the difference between the yield of a Treasury index and the strike price. Yield-based calls have intrinsic value when the Treasury index yield is above the strike price. Yield-based puts have intrinsic value when the Treasury index yield is below the strike price. When interest rates (yields) increase, yield-based call premiums will increase. Bond prices move in the opposite direction, falling when interest rates increase.
If interest rates increase, which TWO of the following events will most likely occur? Yield-based call premiums will increase Yield-based put premiums will increase Bond prices will rise Bond prices will fall I and III I and IV II and III II and IV Explanation: Incorrect. The value of yield-based options is determined by the difference between the yield of a Treasury index and the strike price. Yield-based calls have intrinsic value when the Treasury index yield is above the strike price. Yield-based puts have intrinsic value when the Treasury index yield is below the strike price. When interest rates (yields) increase, yield-based call premiums will increase. Bond prices move in the opposite direction, falling when interest rates increase.
Two brothers open a joint account to trade options. Who will be required to sign the options agreement? The brother with the larger contribution to the account The brother with the smaller contribution to the account Either brother Both brothers
In a joint options account, it is necessary for both parties to sign the options agreement. It is also necessary to record financial information for both parties.
Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company? There is a limit on the amount of registered stock the director may purchase There is no limit on the amount of registered stock the director may purchase There is a limit on the amount of unregistered stock the director may sell There is no limit on the amount of unregistered stock the director may sell I and III I and IV II and III II and IV Explanation:
Incorrect. Restricted stock is stock that is not registered and is typically acquired by an individual through a private placement. With regard to restricted stock, the purchaser must hold the stock for six months before she may dispose of it. Control stock is registered stock that is acquired by an affiliate (control) person, such as an officer or director, in the secondary market. A control person who acquires stock through an open-market purchase may sell the stock anytime. There is no limit placed on the number of registered shares an insider may purchase. According to Rule 144, there is a restriction on the sale of both restricted and control stock.
Which TWO of the following persons may be permitted to purchase issuer-directed shares of an equity IPO? An employee of a FINRA member whose spouse is a director of the issuer A portfolio manager of a mutual fund purchasing for his personal account Employees of the issuer if the issuer is a FINRA member An outside attorney assisting in the IPO I and III I and IV II and III II and IV
Issuer-directed securities provide an exemption for certain individuals under the New Issue Rule. Under this provision, issuers may direct securities to the parent company of the issuer, the subsidiary of an issuer, and employees and directors of an issuer. The issuer-directed provision also permits immediate family members of employees and directors to participate in the offering. Registered representatives are also allowed to purchase shares of an equity IPO if the issuer is that person's employing broker-dealer or is the parent or subsidiary of the broker-dealer. An attorney hired to assist in the IPO is also restricted and, since he is not employed by the issuer, he is not eligible to buy issuer-directed shares. A portfolio manager of a fund may not purchase for his personal account. A purchase may be made on behalf of the fund.
Mr. Brown, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 10 rights plus $10.50 are required to subscribe to one new share of stock Fractional shares become whole shares The record date is Friday, October 17 JPMorgan Chase and Bank of America are the transfer agents Goldman Sachs and Morgan Stanley are the standby underwriters Mr. Brown will tender (submit) his rights to: JPMorgan Chase Bank of America Goldman Sachs Morgan Stanley
JPM or MS, the transfer agents
Keystone Chocolate Co. plans to sell, only in the state of Pennsylvania, shares of a new issue. In order to qualify for a registration exemption under Rule 147, what percentage of the corporation's assets must be located in Pennsylvania, and what percentage of its revenues must be derived from Pennsylvania sources, at the time of the offering? 70% 80% 90% 100%
Keystone is eligible to offer shares in Pennsylvania (PA) under the intrastate exemption (Rule 147) if 80% of its assets are located in PA, 80% of its revenues are derived from PA sources, and 80% of the proceeds from the sale are used in PA. In addition, to qualify for the exemption, 100% of the purchasers of the offering must be residents of PA.
A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of: $150 $300 $420 $525
Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).
Ms. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 10 rights plus $10.50 are required to subscribe to one new share of stock Fractional shares become whole shares The record date is Friday, October 17 JPMorgan Chase and Bank of America are the transfer agents Goldman Sachs and Morgan Stanley are the standby underwriters Ms. Jones owns 87 shares of the XYZ Corporation. How many shares can she subscribe to and how much will it cost her? 8.7 shares plus $91.35 8 shares plus $84.00 9 shares plus $91.35 9 shares plus $94.50
Ms. Jones can subscribe to nine shares at a cost of $94.50. The terms of the rights offering indicate that 10 rights plus $10.50 are needed to subscribe to one new share of stock. Fractional shares become whole shares. She will receive 87 rights. It takes 10 rights to get one new share of stock. 10 rights divided into 87 rights equals 8.7 shares. Since fractional shares become whole shares, Ms. Jones can subscribe to nine shares at a cost of $10.50 a share for a total of $94.50 (9 x $10.50 = $94.50).
If a broker-dealer goes bankrupt, the trustee appointed under the Securities Investor Protection Act is responsible for: Notifying the firm's customers that the firm is in the process of being liquidated Distribution of securities owned by customers that are held by the firm Seeing that the distribution of cash and securities are administered in an orderly manner
Notifying the firm's customers that the firm is in the process of being liquidated Distribution of securities owned by customers that are held by the firm Seeing that the distribution of cash and securities are administered in an orderly manner
Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend? A GTC order to sell 100 XYZ at $50 stop A GTC order to sell 100 XYZ at $50 stop-limit A GTC order to buy 100 XYZ at $50 stop A GTC order to buy 100 XYZ at $50 stop-limit I and II II and III II and IV III and IV
Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked Do Not Reduce (DNR). Orders that are entered below the current market at the time they are entered are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC sell stop and sell stop-limit orders are entered below the market and are reduced on the ex-dividend date
Ms. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 10 rights plus $10.50 are required to subscribe to one new share of stock Fractional shares become whole shares The record date is Friday, October 17 JPMorgan Chase and Bank of America are the transfer agents Goldman Sachs and Morgan Stanley are the standby underwriters Ms. Jones also owns 87 shares of the preferred stock of the XYZ Corporation. How many additional shares can she subscribe to and at what cost? 8.7 shares plus $91.35 9 shares plus $91.35 9 shares plus $94.50 Preferred stockholders are not permitted to participate in a rights offering
Preferred stockholders are not permitted to participate in a rights offering. Only the common stockholders are permitted.
A registered representative is the owner of a marina on the North Shore of Long Island. She wants to build an apartment complex on this property in order to increase the property's cash flow. If she receives a loan from family members, which of the following statements is TRUE?
Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying one of the following provisions. The customer and the registered person are immediate family members. The customer is a financial institution regularly involved in the business of extending credit or providing loans. Both parties are registered with the same firm. The loan is based on a personal relationship between the customer and the registered person. The loan is based on a business relationship independent of the customer-broker-dealer relationship. If the loan is based on provision 1 (borrowing from family members), firm notification or firm approval is not required. If the conditions indicated in provisions 3, 4, or 5 apply, the firm must approve the lending activity prior to the execution of the loan.
Which TWO of the following situations require written notification to an employer?
Registered personnel who pursue outside business interests and who will be compensated, or who participate in private securities transactions, must provide their employers with prior written notification. The employer may then approve or disapprove the participation. A registered person who has an existing account at her firm does not need to provide written notification to her employer for each transaction.
egulation FD applies to: Retail customers Issuers of securities Institutional investors Broker-dealers
Regulation FD applies to issuers of securities. Regulation FD requires that material, nonpublic information disclosed to analysts or other investors be made public. If the disclosure is intentional, the information must be simultaneously disclosed to the public. If the disclosure is unintentional, the public disclosure must be made within 24 hours. Form 8-K, filed with the SEC, is one method of meeting the public disclosure requirement.
Rule 145 applies to a(n): Stock split Stock dividend Adjustment in par value Merger or acquisition
Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.
A broker-dealer has failed because it has a net capital deficiency. Which of the following parties is NOT covered by SIPC?
SIPC provides protection for customer accounts in the event of a broker-dealer's failure. Each account is covered for up to $500,000, of which $250,000 may be cash. SIPC does not insure creditors of the broker-dealer or the failed firm's own inventory account.
When opening an account for an employee of FINRA, the member firm is required to:
Send duplicate account statements only
customer at your firm has an online trading account. If the customer places a limit order for a Nasdaq-listed stock and your firm is a market maker in this security, the order will be: Executed automatically Sent to an ECN Displayed only if it improves the inside market Displayed only if it improves the market maker's quote
The SEC Order Handling Rules require that a customer's limit order be displayed in a market maker's quote if it improves that quote. This is true even if the customer's order does not improve the inside market. The order may (not will) be sent to an electronic communication network (ECN). The order will be executed automatically only if the price and size of the order can be matched in the Nasdaq trading system.
A corporation's shareholders must vote for:
The board of directors has control over dividends but must have shareholder approval for a stock split.
Your client is president of XYZ Corporation and is selling XYZ shares pursuant to Rule 144. A filing must be made with the SEC: 15 days before the sale At the time of the sale 30 days after the sale 90 days after the sale
The filing must be made at the time of the sale and is effective for 90 days.
A customer enters a sell stop-limit order for 100 XYZ at 25.50. XYZ trades occur as follows: 25.50, 25.25, 25.13, SLD 25.50. The customer's order was: Executed at the market price after the order was entered Executed at 25.25 Executed at 25.50 Not executed
The first trade at 25.50 touched the stop price of 25.50 and the order became an active or live order to sell 100 shares of XYZ at a limit price of 25.50 or better. Thus, the stock must increase to at least 25.50 for an execution. The only other trade at 25.50 has the symbol SLD next to it, indicating that a trade occurred previously (assume prior to the other trades shown), was reported out of sequence, and is now being shown to indicate that fact. There is no trade at the customer's limit price of 25.50 after the customer's order became a live order. Therefore, the customer's order was not executed.
A client sells short 1,000 shares of KPL at $46 a share. Fourteen months later the client covers the short and on the same day delivers the stock to close out the short position at $35 a share. For tax purposes, the client will report:
The gain or loss on a short sale is typically treated as a short-term capital gain or loss, since a holding period for the security is not established. The customer closed out the short position the same day, so the holding period was less than one day. In this example, the client has a short-term capital gain taxable in the year the short sale was covered and the stock was delivered.
Which TWO of the following investors would NOT be permitted to purchase shares of an IPO of KMF? An attorney involved in the new issue of KMF An investment company registered under the Act of 1940 that has some restricted persons as shareholders A portfolio manager of an investment company buying for his personal account The general account of an insurance company I and III I and IV II and III II and IV
Which TWO of the following investors would NOT be permitted to purchase shares of an IPO of KMF? An attorney involved in the new issue of KMF An investment company registered under the Act of 1940 that has some restricted persons as shareholders A portfolio manager of an investment company buying for his personal account The general account of an insurance company I and III I and IV II and III II and IV
Someone who wants to hedge a portfolio of long-term bonds will buy: Yield-based call options Yield-based put options VIX call options VIX put options
The prices of bonds are inversely related to the movement of interest rates. If the investor is concerned that rising interest rates will erode the value of the bond portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge. The VIX (volatility index) tends to move inversely with the S&P 500 Index. The VIX usually rises when the S&P 500 Index falls, and falls when the S&P 500 Index increases. An investor will buy VIX call options when he expects the market to decline and volatility to increase. An investor will buy put options on the VIX if he expects the market to rise and volatility to decrease. Many investors will buy VIX call options as a hedge against a possible decline in the stock market. VIX options can be used by investors who expect either an increase or a decrease in volatility. It is not used to hedge a bond portfolio.
Someone who wants to hedge a portfolio of preferred stocks will buy: Yield-based call options Yield-based put options S&P 500 call options S&P 500 put options
The prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. If the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge.
Which one of the following persons is permitted to purchase an equity IPO in her personal account? The cousin of a registered representative The mother-in-law of a registered representative A portfolio manager of a mutual fund A person employed by an insurance company who buys and sells securities
The prohibition against IPO purchases by restricted persons includes: Member firms and any associated person (i.e., an employee) of the member firm. An immediate family member of an employee of a member firm if the equity IPO is purchased from the employee's firm or there is material support between the immediate family member and the employee of the member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. Portfolio managers, which include persons who can buy or sell securities on behalf of institutional investors (e.g., banks, investment companies, investment advisers, insurance companies, savings and loan institutions), as well as anyone whom they materially support. These are people who are in a position to direct future business to the firm, which is the reason for their restricted status. They also may not purchase equity IPOs in their personal accounts. Since, under the rule, a registered representative's cousin is not considered an immediate family member, she is permitted to purchase an equity IPO.
Which of the following choices best describes a wrap account? A personal, joint, and IRA account with one account number A managed account in which advisory and transaction charges are included in one comprehensive fee A consolidated account in which the investor can buy or sell options, equities, or bonds An investment club account with no more than 99 investors
The term wrap account refers to the fee arrangement where one fee, usually ranging from one to three percent annually, is charged by a broker-dealer. The fee is used to cover administrative, portfolio management, and transaction costs. A wrap account is usually managed by an investment adviser.
Transfer agent
The transfer agent is responsible for issuing new certificates, cancelling old certificates, keeping a record of shareholders and the number of shares each owns, and handling problems that come about in cases of missing, lost, stolen, or mutilated securities. The registrar makes sure that outstanding shares do not exceed authorized shares.
A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders? A market order Sell stop $63 Sell limit $63 Sell stop-limit $63
This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63. A market order is not suitable since the client does not want to sell unless the price declines. A market order will not allow the client to receive further profits if the stock increases above $70. A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price. Therefore, a sell limit at $63 is not suitable. Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit.
A customer has a nondiscretionary account at a broker-dealer. The customer received a research report and instructs the registered representative to purchase 500 shares of a specific stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? Contact the customer and ask her to place a limit order to buy the security Purchase the stock no later than the end of that business day Purchase the stock any day that you think is best Have the order preapproved by a principal and then purchase the stock
This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security. In some cases, a registered representative may accept the customer's verbal authorization to make certain decisions without it being considered discretionary. If a customer (1) selects the specific security, (2) decides whether to buy or sell the security, and (3) specifies the number of shares, leaving discretion only as to time and/or price, it would not be considered a discretionary order and written authorization would not be required. The customer mentioned all three of these details. This time and price discretion concerning the order is limited to the trading day on the day the order was placed, and must be noted on the order ticket. The client is permitted to give her RR written instructions for a longer period. There is no requirement to have the order preapproved by a principal.
After tax return
To find the after-tax return of each investment, multiply the return on the security by the complement of the tax rate. For the taxable non-equity position, this rate is 66% (100% minus 34%) or .66. For each taxable equity position, we assume an exclusion of 70%. The corporation's effective tax rate on the residual 30% of income from an equity investment, can be calculated by multiplying the corporation's statutory tax rate of 34% by the residual percentage (34% x 30% = 10.2%). The amount the corporation would earn after tax is the complement of 10.2%, which equals 89.8% (.898). The municipal bond interest is tax-free to the corporation. Now we can compare the after-tax return on each security. The after-tax return on the preferred stock is 4.94% (5.5% x .898). The after-tax return on the common stock is 4.49% (5.0% x .898). The after-tax return on the corporate bond is 4.62% (7.0 % x .66) since the corporation must pay the full statutory 34% rate on this non-equity security. The after-tax return on the municipal bond is 5.5% since no taxes are due on the coupon.
Volume and holding-period restrictions do NOT apply to the resale of private placements when: Purchasers' representatives assist investors Both parties are accredited investors The transaction is initiated by a registered principal The purchaser is a qualified institutional buyer
Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable asset
Lyle, Molly, and Seena have a joint account registered as Tenants in Common. In the event that Seena dies, which of the following statements is TRUE?
Upon learning of Seena's death, the brokerage firm will freeze the account. Seena's executor will then provide documentation to establish authority to act on behalf of the estate. Typically, Seena's estate will become the third joint owner in the existing Tenants in Common arrangement.
Upon written request, duplicate account statements would be required under which TWO of the following circumstances?
Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens a brokerage account at another member, investment adviser, bank, or other financial institution. There is no requirement to send duplicate statements if the customer is an employee at a financial institution.
Upon written request, duplicate account statements would be required in all of the following circumstances, EXCEPT:
Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens an account at another member, investment adviser, bank, or other financial institution. The rule applies to any person employed by a member firm (broker-dealer). There is no requirement to send duplicate statements if the customer is an employee at a bank, investment adviser, or other financial institution.
A broker-dealer is underwriting an initial public offering (IPO) for a company that will be listed on the NYSE. The broker-dealer is required to deliver prospectuses: Only on purchases made, at the public offering price For 25 days after the effective date For 40 days after the effective date For 90 days after the effective date
When a company that is the subject of an IPO is listed, on the effective date of the offering, prospectuses must continue to be delivered on all purchases in the aftermarket for 25 days. The prospectus delivery requirement for an IPO that will not be listed on an exchange continues for 90 days after the deal closes.
A market maker has displayed a firm quote of 15 - 15.50, 5 x 8 for a stock. If a broker-dealer contacts the market maker and wants to purchase 1,000 shares, how many shares is the market maker obligated to sell at 15.50? 800 shares 500 shares 1,000 shares Whatever amount the market maker decides to sell
When a market maker gives a firm quote, the market maker is obligated to buy or sell up to the number of shares at the price quoted. The number of shares that are firm is based on round lots of 100 shares, first the number for the bid and then the number for the offer. The market maker is obligated to buy 500 shares at $15.00 and obligated to sell 800 shares at $15.50. The market maker is permitted to sell 1,000 shares, but only obligated to sell 800 shares
When a stock sells ex-rights, which of the following orders on a designated market maker's book will be reduced? Buy limit order Sell stop order Buy stop order Sell limit order I only I and II only II and III only III and IV only
When a stock sells ex-rights (similar to ex-dividend), the designated market maker will reduce those orders on his book that were entered below the market. A buy limit order and a sell stop order will be reduced by the amount the stock sells ex-rights since these orders are entered below the market.
Bud Jones purchased 100 shares of DEF at 20 on June 16 and passed away on July 27 when the market value of DEF was 25. If the 100 shares of DEF are inherited by Mr. Jones's daughter Mary, what are the tax implications? Mary assumes a cost basis of 20 Mary assumes a cost basis of 25 The holding period for the stock is short-term The holding period for the stock is long-term
When securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period.
n February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is:
When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.
Which of the following choices may write calls covered by XYZ stock? The president of XYZ Corporation The trustee of XYZ Corporation's pension fund XYZ Corporation ABC Corporation II and IV only I, II, and III only I, II, and IV only I, III, and IV only Explanation: Incorrect. Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock
Which of the following choices may write calls covered by XYZ stock? The president of XYZ Corporation The trustee of XYZ Corporation's pension fund XYZ Corporation ABC Corporation II and IV only I, II, and III only I, II, and IV only I, III, and IV only Explanation: Incorrect. Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock
On May 25, the president of MaxCo bought 3,000 shares of MaxCo stock in the open market at $33. Two months later, the stock has increased to $40. If the president now wants to sell the shares: Permission must be granted by the MaxCo board of directors The profit from the trade must be forfeited according to the short-swing profit rule Notification must be made to the corporation's legal counsel Permission must be granted by FINRA
he Securities Exchange Act of 1934 prohibits insiders from making short-swing profits. A short-swing profit is a profit made on stock held by insiders for less than six months. If the president of MaxCo sold stock two months after it was purchased, MaxCo could sue for recovery of the profit. Under Rule 144, the six-month holding period applies only to restricted stock and, since the stock was purchased in the open market, the shares would be considered control stock.
a registered representative agrees to return part of the commission on trades to reduce the cost of the transactions. This practice is:
his practice is known as rebating and is prohibited.
Andrew, a client of yours, anticipates that the value of the U.S. dollar is weakening in relation to the euro and decides to purchase 10 March 95 euro call options at 1.30 when the spot price is 95.55. The contract size of each euro contract is 10,000. Andrew is required to deposit: $95 $130 $950 $1,300
n order to take advantage of the anticipated increase in the value of the euro, Andrew is purchasing 10 euro calls at a premium of 1.30. Euro options are quoted in cents per unit, so the decimal must be moved two places to the left to convert the quote to dollars ($.0130). To calculate the cost of the euro call, multiply the contract size (10,000) times the dollar value of the premium ($.0130). 10,000 x $.0130 = $130 Since Andrew is purchasing 10 options, the total cost is $1,300.
A stock trades ex-dividend on Monday the 20th. What is the last day an investor can purchase the stock and be entitled to the dividend?
o be entitled to receive the dividend, the stock must be purchased prior to the ex-dividend date. Friday the 17th is the last day an investor could purchase the stock and be entitled to the dividend, since it is the business day prior to the ex-date.
elling short against the box is used when a client with a long position sells the same security but borrows the stock to effect delivery rather than delivering the long position. The ticket to sell is still marked short.
selling short against the box is used when a client with a long position sells the same security but borrows the stock to effect delivery rather than delivering the long position. The ticket to sell is still marked short.
