SIE Chapter 7
What's the market outlook for the buyers of put options?
Bearish: Buyers of put options are bearish (i.e., they want the value of the underlying stock to fall).
A municipality borrowing for a short-term period to finance a capital project would issue?
Bond anticipation notes: A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.
Who derives the MOST benefit from a put provision attached to a bond offering?
Bondholders: A put provision allows the bondholder to redeem the bond on a specified date (or dates) prior to maturity. This provision is most likely to be utilized if market interest rates rise.
When watching for signs of inflation, which of the following is one of the most relevant statistics?
CPI: The Consumer Price Index (CPI) measures the price of a basket of goods and services available in the U.S. When it is increasing, it is considered a sign of inflation, which is a general rise in the level of prices.
A broker-dealer acting in an agency capacity will charge customers a?
Commission: When acting in an agency capacity, the broker-dealer will normally charge the customer a commission. A broker-dealer that is always willing to buy and/or sell a security is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and charge a markup when selling stock to a customer.
Which of the following statements is NOT TRUE regarding profit-sharing plans?
Contributions are required to be made each year: In a profit-sharing plan, contributions are not required to be made each year and can be adjusted based on the profitability of the company. The board of directors determines the amount of the contributions, which are in pre-tax dollars and allocated based on a pre-determined formula.
Which shares of preferred stock may increase the most if the value of the company's common stock appreciates?
Convertible preferred stock: Convertible preferred stock can be exchanged for the common stock of the issuer. For that reason, if the common stock's value increases, the market value of the convertible preferred stock will also increase.
The value of American depositary receipts is MOST affected by?
Currency risk: American depositary receipts (ADRs) provide for the trading of foreign securities in U.S. markets. Of the choices given, ADRs will be most affected by currency risk. Currency risk occurs when the value of a foreign currency changes in relation to the value of the U.S. dollar. Falling foreign currency values or rising U.S. dollar values results in a strong dollar. If this happens, the return on foreign investments will fall since the foreign currency purchases fewer U.S. dollars on conversion.
A registered person of a broker-dealer has an existing account at another firm and has followed the proper procedures to open the account. The current responsibility of the registered person is to?
Ensure that her employing firm's guidelines are being followed when trading securities: Employees of broker-dealers who intend to open outside brokerage accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. Once the employees obtain the written consent of their employers, they must ensure that their firms' guidelines are being followed when trading securities.
If the credit rating of an issuer is lowered, which investment will lose the most value?
Exchange-traded notes (ETNs): Although exchange-traded notes (ETNs) are a type of unsecured bond, their rate of return tracks an index. If the issuer of an ETN is unable to pay its investors, the investors don't have claim to any collateral and are general creditors. In other words, ETN investors are exposed to both credit risk and market risk. All of the other products represent ownership in a portfolio, rather than an unsecured bond, and don't have the same degree of credit risk as an ETN.
A customer has placed a market order with a broker-dealer. The broker-dealer must?
Execute at the most reasonable price available: Market orders are executed immediately after being received. Broker-dealers must use reasonable diligence to execute market orders at the best price at the time they are received. For an order to be executed at a specific price or better, it must be entered as a limit order.
A registered representative who just passed the Series 7 Examination disclosed several of the test questions to a colleague who is about to take the same examination. The colleague uses this information, but still fails the test. Which of the following statements is TRUE?
FINRA may discipline both individuals: Both persons are subject to disciplinary action. FINRA considers the content of its qualification examinations confidential; therefore, it's a violation to give assistance to, or receive assistance from, any person taking an examination. Additionally, it's a violation to disclose parts of an examination to another person, to receive parts of an examination from another person, to compromise the contents of a past or present examination in any way, or to knowingly sign a false certification concerning an examination. Although the colleague failed the exam, he's still subject to disciplinary action.
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?
Friday the 17th: To 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.
Which of the following will occur if U.S. imports are increasing?
Gross Domestic Product will decrease: When imports exceed exports, it means that more money is being spent than received. This typically leads to a decrease in the production of U.S. goods (i.e., a decrease in GDP). Monetary policy may then be implemented to use strategies designed to strengthen the dollar, increase yields, and decrease the money supply.
Regarding cash and margin accounts, which of the following statements is NOT TRUE?
In a cash account, a customer is only required to deposit 50% of a purchase: The provisions of Regulation T apply to both cash and margin accounts. In both accounts the required customer deposit must be made by the fourth business day after the trade date. However, the required customer deposit amount is different based on whether the purchase is made in a cash or margin account. For any purchases that are made in a cash account, a customer must make full payment (no credit is extended by the B/D); on the other hand, for any purchases that are made in a margin account, a customer is only required to pay 50% (50% credit is extended by the B/D).
A specialized or specialty fund invests in stocks that are primarily?
In a particular industry or geographical area: A specialized or specialty fund is a type of a fund that invests primarily in a particular industry or geographical area.
A registered person who has been in the securities industry for nine years is subject to the Regulatory Element of continuing education?
In two more years: The Regulatory Element of Continuing Education begins on the second anniversary after a registered person's initial registration and then every three years thereafter. Therefore, the person in this question has had Regulatory Element training on her second, fifth, and eighth anniversaries. The next completion requirement is on her 11th anniversary, which is in two more years.
Deflation will generally cause existing bond prices to?
Increase: Deflation is an economic situation in which the prices of goods and services are declining. It is an unusual occurrence which results in the consumer price index (CPI) decreasing and the economy contracting. In order to stimulate the economy the FRB often lowers interest rates, which causes existing bond prices to rise. Long-term zero coupon bonds tend to perform best during periods of deflation.
An investor has a $5 million position in long-term Treasury bonds. Which of the following types of risk is the investor's greatest concern?
Inflationary risk: Of the choices listed, the greatest concern is inflationary risk, which is the risk that rising inflation will erode the investor's purchasing power. When a significant amount of money is invested in fixed-income securities, an increase in inflation can have detrimental results.
The fund that would probably have the most price volatility is an?
International equity fund: In general, bond funds are less volatile than equity funds. Within the equity category, the NAVs of growth and income bond funds are considerably less volatile than international equity funds whether corporate or municipal. International equity funds are not only vulnerable to market risk, but exchange and political risk as well.
Who derives the MOST benefit from a call provision attached to a bond offering?
Issuers: A call provision allows the bond issuer to redeem its outstanding bonds before they reach maturity. The benefit to the issuer is that, if the bond is called, it's no longer required to make periodic interest payments.
If a broker-dealer decides to change the electronic storage method that it currently uses to maintain its records, what's the firm's obligation?
It must notify its primary regulator at least 90 days prior to using the new method: The SEC allows for the maintenance of records in forms other than paper. For example, firms may maintain their files on micrographic media or electronic storage media. Micrographic media includes microfilm, microfiche, or similar methods, while electronic storage media includes methods of digital storage (e.g., CD-ROM). If a firm decides to use electronic storage media, it must notify its primary regulator prior to the beginning of its use. Also, if a firm changes the form of electronic storage media that it's currently using, it must notify its regulator at least 90 days prior to using the new method.
Which document attests to the validity of a municipal bond issue?
Legal opinion: The legal opinion, which is written by a bond counsel, attests to the validity and tax status of a municipal bond offering.
What type of order is used if a customer wants to sell stock at $25 although the stock is currently trading at $20?
Limit order: A sell limit order is typically placed above the current market price and instructs a broker-dealer to sell at the limit price or higher. On the other hand, sell stop orders are placed below the current market price and are only executed if the market price falls to or below the stop price. Market orders don't specify a price and receive immediate execution.
A customer purchases 1,000 shares of stock at $55 in a cash account. On the payment date, the stock is selling at $65 per share but the customer has not paid for the transaction. Which of the following actions would be considered freeriding?
Liquidating the stock at $65 and using the sale proceeds to pay for the original purchase: The customer would not be permitted to liquidate the stock and use the sale proceeds to pay for the original transaction. This prohibited practice is known as freeriding. To satisfy the $55,000 requirement in the cash account, the customer may deposit the full amount in cash. There is no violation if the customer deposits more than the amount required
When documenting an investor's profile, which of the following is important?
Liquidity needs: Liquidity needs is one of the factors that make up an investor's profile. By itself, marital status is not relevant when making recommendations. An investor's current employment is more important than his employment history. Education is not nearly as important as a client's investing experience.
Which of the following is NOT a type of systematic risk?
Liquidity risk: Liquidity risk is an example of unsystematic or diversifiable risk, which is applicable to a specific security. On the other hand, systematic risk is one that affects all asset classes in the same manner. Examples of systematic risk include market risk, interest-rate risk, and inflation risk. If there is an overall decline in the stock market, it will cause stock prices to go down (market risk). If market interest rates rise, it will cause bond prices to decline (interest-rate risk). And finally, an increase in the rate of inflation will generally cause the overall bond market to decline.
Of the choices listed, which one is Moody's lowest rating for a municipal note?
MIG 3: MIG stands for Moody's Investment Grade and refers to ratings given municipal notes. There are three MIG ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating for bonds, and C is its lowest rating for bonds.
For a competitive offering of municipal bonds, which document notifies potential bidders of the general features of the offering?
Notice of Sale: For a competitive offering of municipal bonds, the Notice of Sale is created by the issuer to provide potential bidders with information regarding the general characteristics of a proposed bond offering.
If an employee of a broker-dealer wants to open a brokerage account at another member firm, the employee's obligation is to?
Obtain her employing firm's prior written consent and provide written notification to the executing firm: Employees of broker-dealers who intend to open outside accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. In addition, before an outside account is opened, the employees are required to provide written notification to the executing firm of their association with another member firm. However, there is no requirement to obtain their employing firm's approval for each order. If a newly hired employee wants to maintain an account that he had opened prior becoming associated with a broker-dealer, he is required to obtain his employing firm's written consent within 30 days of the beginning of his employment.
A person is subject to the Regulatory Element of Continuing Education?
On the second anniversary of her registration and every three years thereafter: The Continuing Education Regulatory Element for registered personnel begins on the second anniversary of her initial registration, and then is triggered every three years thereafter. If representatives do not participate, their registration becomes inactive. There is no graduation from the Regulatory Element.
Which of the following statements is TRUE about variable annuities?
Payout is based on a number of annuity units, which remains fixed for the duration of the payout period: A variable annuity does not give an annuitant a fixed-dollar return over a fixed number of years. Variable annuities give the annuitant a variable return based on the value of the securities in the separate account of the annuity. Payout is based on the number of annuity units that an investor receives upon annuitizing. The number of units remains fixed for the duration of the payout period. The investor takes on all investment risk since payments are not guaranteed. Investors are allowed to vote on certain issues.
In order to convince a customer to purchase mutual fund shares, a registered representative pledges to reimburse the client for a predetermined amount if the shares perform poorly. This activity is?
Prohibited: The RR's pledge to reimburse the client for losses represents a guarantee against a loss. This type of activity is a prohibited practice.
For which of the following circumstances is there a required tax payment?
Realized gain: Taxes are paid on realized capital gains; however, unrealized capital gains or losses (paper profits or losses) have no impact on the investor's tax situation. Capital or realized gains are generated when an investment is sold for a greater value than its cost basis. Return of capital occurs when an investor receives a portion of her original investment back. Since this return is not considered either income or a capital gain, it's not a taxable event.
If a registered representative terminates employment with a member firm, the jurisdiction of FINRA?
Remains effective for two years following termination: FINRA retains jurisdiction over a registered representative for a period of two years following resignation.
If a registered representative terminates employment with a member firm, the jurisdiction of FINRA?
Remains effective for two years following termination: FINRA retains jurisdiction over a registered representative for two years following resignation.
If a customer fails to deposit the required amount within the prescribed time, Regulation T?
Requires the brokerage firm to freeze the account for a specified period: According to Regulation T, any purchases that are made in either cash or margin accounts must be paid for promptly. If they are not paid for within two business days of the regular-way settlement date, the broker-dealer may cancel the transaction by selling out the securities. After selling out the customer's securities, the broker-dealer is required to freeze the account for 90 days. For the 90-day period, all purchases must be paid for in advance; however, once the 90 days have elapsed, the customer is considered to have reestablished credit and may once again be extended normal credit terms.
Which FRB tools determines the amount of money that member banks must keep on deposit?
Reserve requirements: The FRB sets the reserve requirements for member banks, which determine the amount of money that banks must keep on deposit. When banks have excess funds they tend to lend them to other banks that have deficits.
If an investor purchased a security and receives part of his original investment back, this is considered a(n)?
Return of capital: A return of capital occurs when an investor receives a portion of his original investment back. Since this return is not considered either income or a capital gain, it's not a taxable event.
Which of the following statements is NOT TRUE?
SEC record retention rules generally require a firm to maintain records in an easily accessible location for the first three years: All of the statements are true except that SEC record retention rules generally require a firm to maintain records in an easily accessible location for the first three years. Instead, a firm is required to maintain records in an easily accessible location for the first two years.
Which of the following statements is TRUE regarding the role of SIPC?
SIPC covers separate customers: SIPC covers separate customers of a broker-dealer. An individual would be viewed as a separate customer. An individual who holds a personal account and an IRA would be treated as two separate customers.
A registered representative has found an investment that her firm does not offer, but that she believes is suitable for many of her clients. She makes an arrangement with another firm which allows her to refer clients to the firm and receive fees in return for their investment. If this is not disclosed to her firm, the activity is referred to as?
Selling away: This prohibited practice is referred to as selling away. Selling away involves a registered representative engaging in private securities transactions by selling securities outside of the regular scope of her employment and without her firm's approval. In this situation, the representative is required to provide written notification to her firm prior to any transaction and, since she will be compensated, her firm is required to approve the transactions and maintain the records related to the transactions. Churning is defined as excessively executing transactions in a client's account for the sole purpose of generating commissions without regard to suitability. Front-running involves placing a personal order in front of a larger client's order to take advantage of the ultimate impact that the client's order may have on the security's value. Breakpoint sales involve offering mutual fund shares just below the dollar level at which a customer could receive a sales charge discount.
All of the following statements are TRUE about closed-end investment companies, EXCEPT that the?
Shares may not sell below the current net asset value: Closed-end investment companies are bought and sold in the same manner as common stocks. If a customer wants to sell a closed-end fund at the market, he would receive the current bid price (the market quote, not the net asset value). If a customer wants to buy a closed-end investment company at the market, he would buy it at the current offering (asked) price. The market price of the shares can be at, above, or below the net asset value. Closed-end investment companies have only one issue of shares. Once sold, no new shares are issued. The amount of outstanding shares remains constant. The shares may be listed on an exchange or may trade in the OTC market.
A customer has recently closed her account. How long is her broker-dealer required to keep records related to her account?
Six years: Although many brokerage records are kept for three years, a broker-dealer is required to keep customer records for six years after an account is closed. Customer complaints must be kept for four years.
A broker-dealer must maintain customer account records for how long after an account is closed?
Six years: Records that relate to customer accounts must be maintained for a total of six years after the account is closed. For the first two years, the records must be in an easily accessible location.
A reverse stock split creates a?
Smaller number of shares: A reverse stock split creates a smaller number of shares. For example, if a company had 10,000,000 shares outstanding and declared a 1-for-10 reverse stock split, after the split the company would have 1,000,000 shares outstanding. Each stockholder would receive one share for every 10 shares previously owned. A company will do this because many investors shy away from low-priced stocks and a company may want to raise the price of its stock. Additionally, a company may need to raise the stock price to avoid delisting from an exchange.
Which of the following is a prohibited practice?
Spreading a rumor about a company on social media and then buying the company's shares: Some investors have spread false or misleading information about companies to influence the price of stocks and bonds. The development of the internet and the overwhelming popularity of social media has increased the ability to fraudulently impact the price of securities using unsubstantiated rumors. The spreading of rumors can impact the price of a security in either a positive or negative manner. For example, in an effort to drive down the price of a company's stock, a person may use social media to spread either positive or negative news concerning a company. Although buying or selling a company's stock after hearing a rumor is not recommended, it's not a violation. The key to this question is recognizing that spreading a rumor to influence the price of a security is prohibited.
A type of order that becomes a market order when a round-lot trades at or through a particular price is called a?
Stop order: A type of order that becomes a market order when a round-lot trades at or through a particular price is called a stop order. A variation of a stop order is a stop-limit order, which is activated when a round-lot trades at or through a particular price, along with the requirement that the limit price be satisfied.
Buy-and-hold and systematic rebalancing are examples of passive approaches to asset allocation. Both of these methods are based on?
The Efficient Market Hypothesis: The Efficient Market Hypothesis (Theory) states that financial markets are efficient and that the prices of securities reflect all known information; therefore, it is impossible to outperform or time the market. Both buy-and-hold and systematic rebalancing approaches are based on the Efficient Market Hypothesis. Sector rotation is the moving of investments from one industry sector into another in anticipation of a change in the economy. Indexing involves purchasing securities that are a part of a major index or purchasing and index fund. Dollar-cost averaging is a method of investing that focuses on making consistent dollar investments regardless of share prices.
A registered representative has just received an institutional order to buy 500,000 shares of ABC stock. If the RR enters an order to buy 1,000 shares of ABC stock for his personal account before the institution's order is executed, which of the following is TRUE?
The RR is guilty of front running the institutional order: The institutional order is large enough to impact the market price of the stock. The RR's entering of an order for his personal account is a violation that's referred to as front running. The RR should have entered the institutional order first, then waited until it was executed, before entering the order for his account.
According to FINRA's Investor Education and Protection Rule, a firm is NOT required to provide customers with which of the following once per year?
The SEC website address: The disciplinary history of any registered person can be obtained by calling a toll-free number or visiting a website that's set up by FINRA (BrokerCheck®). Under FINRA's Investor Education and Protection Rule, a firm is required to provide customers with the following information once per year: The FINRA BrokerCheck® hotline number The FINRA website address A statement regarding the availability of an investor brochure that includes information describing BrokerCheck® There is no requirement to provide the SEC website address.
Which of the following is NOT considered a self-regulatory organization (SRO)?
The Securities Exchange Commission (SEC): The Securities and Exchange Commission is an independent federal government agency that's responsible for protecting investors, maintaining fair and orderly securities trading markets, and regulating the process by which issuers raise capital in the primary market. The SEC allowed for the creation of separate SROs to be responsible for regulation of specific aspects of the securities industry. Examples of SROs include FINRA, the MSRB, and the CBOE.
If a customer enters an order that is good for one month only, who is responsible for cancelling the order at the end of the month if the order is not executed?
The brokerage firm that entered the order: A customer can enter an order good for a week, a month, or any specified time. If the order is not executed by the end of the specified time, the brokerage firm is responsible for cancelling the order.
An investor purchases a security and subsequently sells it. In order to determine a gain or loss on the investment, which of the following is required?
The cost basis: To determine the gain or loss on an investment, the investor must calculate her cost basis in the security. Basis represents the total amount that an investor has paid to purchase a security. The calculation typically includes the commissions or other fees which are paid to the brokerage firm when the securities are purchased. Ultimately, the difference between the cost basis and sale price determines the amount of the realized gain or loss on the investment.
All of the following must be included in a preliminary prospectus according to the Securities Act of 1933, EXCEPT?
The final offering price: A preliminary prospectus (red herring) is issued to obtain indications of interest on a prospective new issue of securities. This document will have a written statement on it that states that the prospectus may be subject to change. This statement will be on the left border of the cover page. The red herring will state the purpose for which the funds are being raised as well as the financial history of the issuing company. The item that will not appear is the final offering price. Only a price range is provided.
A broker-dealer has received no written complaints from its customers. Which of the following statements is TRUE?
The firm is required to maintain an empty complaint file: Even if a member firm has received no written complaints, the firm must still maintain an empty file. FINRA need not receive a report that no complaints were received by the firm.
To determine whether churning has occurred in a discretionary account, the primary concern is?
The frequency of trading: To determine whether churning has occurred, the primary concern is the frequency of trading. Even if all of the separate investments made are suitable, the frequency of trading may be deemed inappropriate. Although a client may have realized a profit, the number or frequency of trades may not meet the client's objectives. In a discretionary account, a registered representative is able to make investment decisions with both limited and full trading authority
In a direct participation program, which of the following parties is subject to the MOST risk in a limited partnership?
The general partner: The general partner has the most risk in a limited partnership. The general partner directs all management affairs of the partnership. He is responsible for all the liabilities of the partnership. The limited partner has no management capacity in the partnership. The limited partner's risk is his investment. Most direct participation programs are set up as limited partnerships, which provides for the flow-through of tax consequences and benefits to their investors (limited partners).
Which of the following statements is TRUE in relation to the buyer of a call option?
The investor has limited risk: A purchaser of a call option would have limited risk with the potential for unlimited profit. The risk is the possibility of losing the entire premium (cost of the option). The owner of the call option is not an equity owner of the stock unless and until the option is exercised.
Which of the following statements is NOT TRUE concerning a customer who is short a security?
The maximum loss is limited: A customer executing a short sale is anticipating a decrease in the market value of a security. This is known as a bearish strategy, and the customer is hoping to buy back the security or cover the short sale at a lower price. The maximum loss is not limited, i.e., it is unlimited since the customer would have a loss if the market value of the security increased, and there is no limit as to how high the price can rise. Short selling is considered a speculative strategy. The maximum gain is limited since the price of the stock cannot fall below zero.
Which of the following actions by the Federal Reserve Board results in a decrease in the money supply?
The sale of securities in the open market: The sale of securities by the Federal Reserve Board in the open market results in the withdrawal of reserves from the banking system, thereby decreasing the money supply. All the other actions by the FRB result in an increase in the money supply.
The value of the conversion feature on a convertible bond is determined by?
The stock price: Convertible bonds can be converted into a pre-determined number of shares of the issuer's common stock (i.e., conversion ratio). Investors will likely convert their bonds if the price of the stock rises or is expected to rise. The other features on a bond (e.g., its maturity date or interest rate) will not have as significant an impact on the value of the conversion feature.
An investor is selling 400 shares of ABC stock. The client delivers four 90-share certificates and one 60-share certificate. According to the good delivery rules?
This does not constitute good delivery: Good delivery requires that certificates be in 100-share units, multiples of 100, or any combination which adds up to 100 shares. This is also not a good delivery because round lots cannot be created.
What is the primary function of the custodian bank of an investment company?
To provide for the safekeeping of the fund's securities and cash: Custodian banks provide for the safekeeping of the fund's securities and cash. The issuance and redemption of mutual fund shares is done by the transfer agent. The fund's portfolio is managed by the investment adviser.
A mother wants to gift money to her son. If she doesn't want the son to be able to use the money for living expenses, which of the following accounts is the most beneficial?
Trust account: Trust accounts are set up to pass money and property to another person and, since they can be set up with restrictions on withdrawals, this is the best option for the mother. Although funds in 529 plans cannot be used for living expenses (they can only be used for education), they're not as flexible as a trust account.
Which of the following statements is TRUE if interest rates are lower in the U.S. than they are overseas?
U.S. investors will invest overseas: If interest rates are lower in the U.S. than they are overseas, this will typically lead to U.S. investors investing overseas. This will decrease the demand for the dollar, which results in a weaker dollar and foreign goods being less attractive.
An investor would have the right to buy the stock of a corporation for the longest period of time by purchasing a?
Warrant: A warrant is the right to purchase a fixed number of shares, at some future time, at a fixed price. This is also true of rights and call options but warrants may be exercised over a longer period of time. A put option is the right to sell securities at a fixed price within a fixed period of time.
Treasury stock ?
Was previously issued stock that has been subsequently repurchased by the corporation: Treasury stock is stock that has been reacquired by the issuing corporation. Treasury shares don't receive dividends and don't carry voting rights.
The maximum political contribution from a municipal finance professional (MFP) to a candidate for whom he can vote is?
$250: The maximum political contribution from an MFP to a candidate for whom he can vote is $250 per election. Contributions in excess of this amount will subject the firm to a two-year ban on municipal securities business with that issuer.
XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of XYZ common stock is?
$90,000,000: A company's market capitalization is found by multiplying the market value by the outstanding shares. $20 market value x 4,500,000 shares outstanding = $90,000,000.
An investor owns 300 shares of ABC common stock and it has a current market price of $40. If ABC executes a 1-10 reverse stock split, the investor's position after the split will be?
30 shares at $400 per share: In a reverse stock split, the number of shares decreases by the split ratio (1/10) and the share price increases by the inverse of the split (10/1). An investor who owns 300 shares before a 1-10 reverse split will own 30 shares afterwards (300 shares x 1 ÷ 10 = 30 shares). The stock's price will increase from $40 to $400 ($40 x 10 ÷ 1 = $400). Keep in mind, an investor's overall position is neither increased nor decreased as the result of a split. The investor's original position was $12,000 (300 shares x $40) and the investor's post-split position remains $12,000 (30 shares x $400).
According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within?
7 days: Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.
In which of the following situations must a broker-dealer file a Currency Transaction Report (CTR)?
A customer opens an account with $11,000 in cash: Currency Transaction Reports must be filed when a customer deposits a total of more than $10,000 in cash in any one day.
According to FINRA rules, which of the following forms of non-cash compensation for mutual fund sales is unacceptable?
A fund wholesaler provides and all-expenses paid trip to the representative with the most sales of that company's funds: Non-cash compensation is strictly regulated. Generally, mutual fund wholesalers are prohibited from providing non-cash compensation unless it involves reasonable reimbursement or payment for educational related expenses. A fund wholesaler that provides an all-expenses paid trip for the registered representative with the most sales of the wholesaler's fund shares is a violation. Awards for sales-related activities cannot be based on the sale of any specific investment, but must be for total sales.
Which of the following statements is TRUE concerning the opening of a cash account?
A principal of the firm must sign the new account form: A principal of the firm must sign the new account form. Although many firms have established internal rules about obtaining a client's signature to open a cash account, it's not a FINRA requirement.
When a firm's customer exercises a call option, the firm will submit an exercise notice to the Options Clearing Corporation. The Options Clearing Corporation, in turn, will select a firm to receive the exercise notice based on?
A random selection basis: The Options Clearing Corporation selects a member firm on a random selection basis only. Member firms can select customers with open short positions on a first-in, first-out basis, a random selection basis, or any method that is fair and equitable.
An investment that provides investors with a floating rate of interest, a stated maturity, and the ability to put the security back to an intermediary on a pre-determined basis is referred to as?
A variable rate demand obligation (VRDO): Variable rate demand obligations (VRDOs) provide a floating rate, a fixed maturity, and the ability to sell (i.e., put) the security back to a financial intermediary. VRDOs can be put back at any time that the interest rate is reset, which may be daily, weekly, or monthly.
A customer has an account with a discount broker-dealer that specializes in online trading. If the customer is being charged a commission, the firm is MOST likely acting in which of the following capacities?
Agent: A broker-dealer who charges customers a commission is acting as an agent or broker. A broker-dealer who charges customers a markup or markdown is acting as a principal or dealer.
The type of securities distribution that would be completely cancelled if not fully subscribed to is a(n)?
All-or-none: There are several different methods that can be used to underwrite securities. In an all-or-none deal, if the entire issue is not sold, it will be returned to the issuer. An underwriting done on a best-efforts basis allows the underwriter to return to the issuer any unsold securities after the transaction takes place. In a firm-commitment underwriting, the broker-dealer is required to keep any unsold shares for itself.
Which of the following securities are required to be registered under the Securities Act of 1933?
American Depositary Receipts (ADRs): Securities that are sold to U.S. investors are generally required to be registered with the SEC. ADRs are a way for American investors to buy foreign stocks and, since ADRs are traded on U.S. exchanges, they need to be registered under the Act of 1933. Eurodollars are bonds that pays interest in U.S. dollars, but they're sold to foreign investors. As a result, they don't need to be registered with the SEC. Both municipal bonds and bonds that are issued by the U.S. government are exempt from registration with the SEC.
Fee-based accounts are generally suitable for?
An account that's rebalanced frequently: Fee-based accounts charge clients an annual fee that's based on a percentage of assets under management (AUM). These accounts are suitable for clients that trade frequently since the annual fee typically includes an unlimited amount of trading. Commission-based accounts that charge per transaction are more suitable for clients who don't trade frequently (e.g., buy-and-hold investors).
An accumulation unit in a variable annuity contract is?
An accounting measure used to determine the contract owner's interest in the separate account: An accumulation unit in a variable annuity contract is an accounting measure used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts, with differing objectives and portfolios.
An investor sold 5 JOJO April 70 calls for a premium of 6 points each. If the market price of JOJO is $74 these options have?
An intrinsic value of 4 and a time value of 2: A call will have intrinsic value, also known as being in-the-money, when the market price of the underlying security is higher than the strike price. Since the underlying stock is $74 and the strike price is 70, the option's intrinsic value is 4. The remainder of the 6-point premium, 2, is time value.
After opening an account with a firm a customer must receive an updated privacy notice?
Annually: According to Regulation SP, a privacy notice must be provided to a customer at the time an account is opened and annually thereafter. If this individual did not have an account with the dealer, he would be defined as a consumer and the privacy notice would have to be provided at the time any non-public (personal) information was disclosed to an unaffiliated third party.
Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond?
Approval by the state legislature: State legislative approval is required before a municipality can begin making payments on a moral obligation bond.
