SIE Final 1

Prospectus delivery is required for: A newly issued treasury bonds B existing common stock issues C municipal bond issues D open-end investment company issues

Prospectus delivery is required for: Delivery of a prospectus is required for primary distributions of corporate stocks and bonds, but not exempt securities such as municipal bonds and U.S. Treasuries. Purchases of open-end investment companies (mutual funds) always require a prospectus because they are always considered to be a new issue.

An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is: A $10 B $10 plus a commission C the market price D the market price plus a commission

A $10 Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.

A customer in the 37% tax bracket has $6,000 of capital gains and $10,000 of capital losses. How much loss is deductible from this year's tax return? A$3,000 B$4,000 C$6,000 D$10,000

A $3,000 The customer has a capital gain of $6,000 and a capital loss of $10,000 for a net capital loss of $4,000. Only $3,000 of net capital losses can be deducted in a tax year, so $1,000 of the loss is carried forward to the next tax year.

Payments received by the owner of a tax-qualified variable annuity are: A 100% taxable as investment income B only taxable to the extent of earnings above the holder's cost basis C only taxable to the extent of the holder's cost basis D non-taxable

A 100% taxable as investment income Funds paid into "tax qualified" retirement plans were never subject to tax, since the contribution amount was deductible from income at the time it was made. Earnings build up tax deferred in the plan. When distributions are taken, since none of the dollars in the plan were ever taxed, all of the distribution is taxable (these plans have a "zero cost basis"). Funds paid into "non-tax qualified" retirement plans are not tax deductible. Any earnings build up tax deferred. When distributions are taken, the portion that represents the return of original after tax investment is not taxed; while the portion that represents the tax deferred earnings buildup is taxable.

Assuming shares of Scary Clown Entertainment are trading as follows: Last: 9.05 Bid: 9 Ask: 9.35 What is the price a customer will get for a market order to sell? A 9 B 9.01 C 9.05 D 9.35

A 9 The "bid" price is the price a market maker is offering to pay, and the "ask" (or offer) is the price a market maker is offering to sell for. The bid-ask (or bid-offer) spread is the difference. A market order is an order to buy or sell immediately, at "the market." A customer who wants to buy immediately will pay at the ask (offer) price and a customer who wants to sell immediately will get the bid price. In this case, the bid price is $9 per share so a customer wanting to sell at the market should get that price.

If a customer has a gain on a long stock position that he or she wishes to protect, which statement is TRUE? A A sell stop order will be entered below the current market price B A sell stop order will be entered above the current market price C A sell limit order will be entered below the current market price D A sell limit order will be entered above the current market price

A A sell stop order will be entered below the current market price The customer will "lose" the gain on a long stock position if the market begins to fall. To sell out the position in a falling market, the order must be a sell stop order (placed below the market). Sell limit orders are used to sell if the market rises.

An underwriter is planning a road show for a new IPO. Which of the following actions is permitted during the road show? A Accepting indications of interest B Guaranteeing a maximum purchase price C Taking a deposit for an order D Providing a final prospectus

A Accepting indications of interest A road show takes place during the cooling off period. During this period, the underwriter is not allowed to accept deposits for firm orders, promise a price for a future order, or provide a copy of the final prospectus. They are permitted to accept indications of interest and provide a red herring (a preliminary prospectus.)

What entity was created to maintain an electronic book entry record of stock ownership and to handle a high volume of daily transactions? A DTC B FINRA C OCC D MSRB

A DTC Depository Trust and Clearing Corporation (DTCC, sometimes just called DTC), is owned by U.S. banks and brokerage firms. It is the central clearing house for stock and bond transactions, and also maintains custody of both physical certificated securities and electronic book-entry securities. The OCC (Options Clearing Corporation) performs a similar function for the options markets.

Which of the following represents a major difference between equity and debt securities? A Debt securities represent a loan to the issuing company, while equity securities represent ownership in the issuing company B The value of debt securities is not influenced by economic conditions, while the value of equity securities is influenced by them C The maximum profit for equity securities is limited by the amount invested, while the maximum profit for debt securities is not limited D Equity securities trade in the secondary market, while debt securities do not

A Debt securities represent a loan to the issuing company, while equity securities represent ownership in the issuing company By definition debt securities are a promise-to-pay made by the issuer for a fixed amount of money lent by the investor who purchases the securities. Equity securities represent shares of partial ownership in the issuing company purchased by investors. Both equity and debt securities are influenced by economic conditions, though each may be more popular during different economic phases. Also, maximum profit for equity securities is unlimited, while the profits associated with debt securities are usually limited by their fixed nature. Finally, both equity and debt securities trade in the secondary market.

A broker-dealer that is guilty of churning may best be described to have engaged in: A Excessive buying and selling chiefly to generate commissions B Making discretionary trades without the customer's consent C Trading on behalf of retail customers without determining their suitability D Executing transactions without regard to obtaining a fair price for its customers

A Excessive buying and selling chiefly to generate commissions Churning is excessive trading in a customer's account to generate commissions. Churning is a prohibited practice. A discretionary trade is one made by the broker without the customer's knowledge. This practice is not allowed without the customer's prior written consent. Broker-dealers are also required to determine its customers' suitability for trading and to make reasonable efforts to obtain a fair market price.

Which of the following is true of a bond's current yield? A It is continuously changing B It changes only after the bond makes each semiannual interest payment C It changes on an annual basis D It is typically the same for the life of the bond

A It is continuously changing Current yield is a snapshot approximation that represents the return an investor might expect to receive if she purchased a bond today and held it for a year. It is calculated by the formula CY = Coupon payment/Current market price. CY is an approximate valuation because the market price of the bond is constantly fluctuating due to changing market conditions. Thus a bond's CY can be said to change on a continuous basis.

Issued shares would be: A Outstanding shares + treasury shares B Authorized shares - treasury shares C Treasury shares + issued shares D Outstanding shares - authorized shares

A Outstanding shares + treasury shares Authorized shares are what the corporation has listed in its articles of incorporation. Authorized shares is a big, somewhat arbitrary number reflecting what could be issued, not what has been issued. The portion of authorized stock that has been sold to to shareholders is called issued stock. Treasury stock represents shares of issued stock that have been repurchased by the company and removed from public circulation. Treasury stock is treated as though it is still in the hands of the shareholder, in this case the corporation, hence it is still considered issued stock, however it has no voting rights and pays no dividends. When treasury stock is withdrawn from issued stock, the amount of stock remaining in circulation is the number of shares outstanding. Shares outstanding represents all shares in circulation and it is this number that is used to determine market capitalization and earnings per share.

Securities that are not required to be registered with the SEC are: A Federal covered securities B Exempt securities C Non-exempt securities D Mutual funds

B Exempt securities Exempt securities are not required to be registered with the SEC. These include U.S. Treasury securities, municipal securities, and agency securities.

A customer buys 100 shares of ABC stock at $20 per share. Two months later, the stock is quoted at $10.00 - $10.50. The registered representative that sold the stock to the customer offers to repurchase the shares at $18. Which statement is TRUE? A This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss B This is prohibited because the registered representative is interpositioning himself between the customer and the current "inside" market C This action is permitted, as long as the principal approves in writing prior to the proposed trade D This action is permitted as a method of maintaining customer "goodwill" with the firm

A This is prohibited because the FINRA Conduct Rules do not allow customer accounts to be guaranteed against loss The action of repurchasing the customer's shares at a price higher than the current market to limit the customer's loss, is a prohibited practice under FINRA rules. Customers cannot be guaranteed against loss. If the market moves up, this customer wins; if it moves down, this customer loses.

Who would take the financial risk in a firm commitment underwriting for an IPO? A Underwriters B Selling group members C Issuer D IPO investors

A Underwriters In a firm commitment underwriter, the underwriters purchases all of the securities at a discount from the issuer, and the sells the securities at the public offering price. The underwriter assumes all of the financial risk of any unsold shares.

The manager of a growth fund would make investments in: A common stocks B blue chip stocks C preferred stocks D Treasury bonds

A common stocks Growth funds invest in companies that are growing rapidly - typically younger companies in rapidly expanding industries. Such companies are expected to have growing stock prices, producing long-term capital gains, and pay no dividends. In contrast, blue chip companies are mature and stable, with relatively high dividend payout ratios. Most of an investor's return in blue chip stocks is from dividends - not from share price growth. Since you must choose between either "common stocks" or "blue chip stocks" here, common stocks are the better choice. Both preferred stock and bonds are fixed income securities. There is no "growth" in these securities. The only potential for capital gains is if market interest rates drop, forcing prices of fixed income securities up.

Interest income from municipal bonds purchased by a resident of the issuing State is: A exempt from Federal, State and Local tax exempt from Federal, State and Local tax B exempt from Federal tax and subject to State and Local tax-exempt from Federal tax and subject to State and Local tax C subject to Federal tax and exempt from State and Local tax subject to Federal tax and exempt from State and Local tax D subject to Federal, State, and Local tax

A exempt from Federal, State and Local tax exempt from Federal, State and Local tax, The interest income from municipal bonds is exempt from Federal income tax; but is subject to State and Local tax. However, if a bond is purchased by a State resident, then the State exempts that issue from taxation as well.

Which of the following statements BEST describes price stabilization? A placing a bid to maintain the price of a security B setting a price to ensure maximum profits with the sale of securities C setting the price of an offering made under Regulation D D a negotiated price agreed upon between the acquiring and target company in an acquisition

A placing a bid to maintain the price of a security A price stabilization is made by an underwriter in relation to the offering of securities to support the price of the securities being offered. The underwriter will issue the stabilizing bid by making a notation so that the relevant Exchange where the security is trading is aware that it is a stabilizing price.

According to FINRA, no person associated with a member may give or receive from another person, principal, proprietor, employee, agent or representative of another person anything of value in excess of how much per person per year? A$100 B$500 C$1,000 D$2,000

A$100 FINRA Rule 3220 states that no member or person associated with a member shall give or be given anything of value, in excess of one hundred dollars per individual per year to any person, principal, proprietor, employee, agent or representative of another person where such payment is in relation to the business of the employer of the recipient of the payment or gratuity.

For bonds trading at a premium, rank the yield measures from highest to lowest: A Yield to Maturity, Current, Yield to Call, Nominal B Nominal, Current, Yield to Maturity, Yield to Call C Current, Nominal, Yield to Maturity, Yield to Call D Yield to Call, Yield to Maturity, Nominal, Current

B Nominal, Current, Yield to Maturity, Yield to Call

Mutual funds must send their financial statements to shareholders: A once a year B two times per year C three times per year D four times per year

B two times per year Mutual funds must send their financial statements to shareholders semi-annually (twice a year).

All of the following help investors lower their tax bills, except: A Step-up cost basis for inherited securities B Step-up cost basis for securities received as a gift C The treatment of commissions on securities purchased D The treatment of commissions on securities sold

B Step-up cost basis for securities received as a gift When an investor receives securities as a gift, her tax basis will be the lower of the tax basis of the person giving the gift or the market value of the securities when the gift is made. In other words, the person receiving the gift does not receive a step-up in basis. Because a lower tax basis will ensure that an investor will pay more taxes when the securities are sold, this method of determining tax basis does not work in the investor's favor. However, the tax basis on inherited securities does work in the investor's favor because the tax basis is "stepped-up" to the fair market price at the time of death. Additionally, both the commissions added to the purchase price of securities and the commissions subtracted from the proceeds when securities are sold serve to lower the amount of gains which will be taxed.

If Irving Investor is short an ELP Jun 50 call at 5, and the stock is currently trading at 60, what is his breakeven point? A $45 B $55 C $50 D none of the choices listed

B $55 The breakeven point for calls is calculated by adding the premium to the strike price. $50 + $5 = $55. The actual stock price is irrelevant.

A woman in the highest tax bracket has $105,000 to invest for her teenage child's college education. She wants to make sure that, if he doesn't attend college, that he will not have access to these funds. She should be advised to make the investment in a: A Coverdell ESA B 529 Plan C UTMA account D Growth mutual fund

B 529 Plan The keys here are that the parent wishes to maintain control and wishes to save for college. A 529 Plan allows the parent to maintain control - the kid has no access to the account. There are no income limits on opening a 529 Plan, and this parent is in the highest tax bracket. She cannot open a Coverdell ESA because these are not available to high earners. An UTMA account would allow the kid to control the account at the age of transfer, so this is not the best choice. A growth mutual fund would be taxable each year, while the purchase of a growth mutual fund in a 529 Plan would grow tax free. The 529 Plan is the way to go!

How much of a REIT's annual income must be distributed to shareholders? A75% B90% C95% D100%

B 90% Ninety percent of a real estate investment trust's (REIT) annual income must be distributed to shareholders.

Issuers of municipal bonds offer what in the place of a prospectus? A A special SEC agreement B A disclosure document called an official statement C A document marked alternative to prospectus DA bond resolution

B A disclosure document called an official statement

Which statement is TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase? A All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more annuity units B All interest, dividends, and capital gains from the securities in the account are automatically reinvested and build tax deferred C All interest, dividends, and capital gains from the securities in the account are taxable D All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units

B All interest, dividends, and capital gains from the securities in the account are automatically reinvested and build tax deferred During the accumulation phase, all interest, dividend, and capital gains realized from the securities held in the separate account must be automatically reinvested to buy more accumulation units (NOT annuity units) for the contract holder. The "build-up" of these reinvested dividends, interest and capital gains is tax deferred during this period. This is the major tax advantage of buying a variable annuity over making a direct investment in a mutual fund.

Which of the following types of offerings offers the underwriter the least risk? A Firm Commitment B Best efforts C Variable commitment D Public offering commitment

B Best efforts If the issuer is a smaller, less well-known company, it may engage in a best-efforts commitment with its underwriter. In this kind of agreement, the underwriter agrees to use its best efforts to sell the issuer's securities, but the underwriter does not guarantee that all the shares will be sold. The underwriter is not financially responsible for the securities it does not sell. Best efforts commitments are common for private offerings ‚Also called private placements. In most cases, the investment bank will enter into what is called a firm commitment underwriting with the issuer of the securities. A firm commitment is an agreement that the underwriter will purchase all the securities at a discount and then sell the securities to the public at a public offering price. In this type of agreement, the underwriter is responsible for the marketing and sale of the securities and assumes all the risk of the offering, including the liability of any unsold shares. This is the most common type of underwriting commitment for a corporate offering, and it is preferred by most issuers. Variable commitment and public offering commitment are made-up terms.

How are funds deposited into a fixed annuity? A Into a separate account B Into a general account C Into both a separate account and a general account D Into a fixed index mutual fund

B Into a general account In a fixed annuity, the customer's investment is deposited into the insurance company's general account. This means that the insurance company is responsible for investing the customer's money as it sees fit and for providing a fixed payment over the customer's life. The insurance company thus bears the investment risk, and it is the insurance company's obligation to pay the fixed rate. In contrast, the funds of variable annuities are deposited into a separate account, and the investment risk is borne by the annuity holder. Because of that added risk, variable annuity holders have the potential for higher rewards.

A typical share of common stock has all of the following properties, except: A It is an equity security. B It is callable. C It grants voting rights. D It is freely transferable.

B It is callable. Callability is the right of a security's issuer to "call " the security, meaning that the security holder must return it to the issuer in exchange for some compensation defined in the call provision. Callability is much more common with bonds than stocks. Common stock is a form of equity. Common shareholders generally have the right to vote for corporate directors and to vote on corporate resolutions. Non-voting common stock does exist, but is rare. Typical common stock is freely transferable, with some exceptions such as restricted shares purchased in a private placement.

Secured bonds are backed by: A The full faith and credit of the issuer B Physical property or other real assets C The full faith and credit of the United States government D Nothing

B Physical property or other real assets In the event of default, the property used as collateral for a secured bond can be foreclosed and sold off to repay the bond. Secured bonds are considered high grade, safe investments because their owners are paid off first, ahead of all other bondholders if the company goes out of business and is forced to liquidate.

The person who controls a 529 college savings account can do each of the following, EXCEPT: A Transfer the funds to another qualified beneficiary Transfer the funds to another qualified beneficiary B Return the funds to herself, with earnings subject to a 10% penalty but no tax C Roll over the plan by designating a new beneficiary who is a qualified family member, tax-free Roll over the plan by designating a new beneficiary who is a qualified family member, tax-free D Count up to $18,000 worth of contributions a year against his one-time gift tax exemption

B Return the funds to herself, with earnings subject to a 10% penalty but no tax The individual who opens the 529 plan, rather than the beneficiary, owns and controls the account and may return the funds to himself. However, earnings on the funds will be taxed and are subject to an additional 10% penalty. A 529 plan can be rolled over from one beneficiary to another qualified beneficiary with no tax consequences. A qualified beneficiary is a family member of the original beneficiary.

With increased inflation, interest rates typically _____ and the prices of outstanding bonds typically _____. A Rise; rise B Rise; fall C Fall; fall D Fall; rise

B Rise; fall When inflation increases, interest rates typically rise. Higher interest rates typically lead to decreased market values for outstanding bonds.

A CUSIP number is used to identify a: A Transaction B Security C Broker-dealer D Underwriting syndicate

B Security A CUSIP number is the identification number of U.S. and Canadian securities. Municipal securities are required to have a CUSIP number if they are eligible for CUSIP number assignment and are not municipal fund securities.

General obligation (GO) bonds are: A Secured bonds backed by the full faith and credit of the municipality B Unsecured bonds backed by taxpayers C Bonds that pay higher interest rates than revenue bonds D Used to fund specific projects and paid for by revenue stream generated by the project

B Unsecured bonds backed by taxpayers Municipal bonds come in two basic types: general obligation bonds and revenue bonds. The two types are distinguished by how they are funded. General obligation (GO) bonds are unsecured bonds backed by the full faith and credit of the municipality and paid for by taxpayers. Revenue bonds are secured bonds used to finance specific projects and are funded by the revenue stream generated by the project. While GO bonds are unsecured and revenue bonds are secured, GO bonds are generally viewed as less risky than revenue bonds because the municipality is obligated to raise taxes to pay general obligation bondholders if need be. Because they are thought of as safer, GO bonds typically pay lower interest rates than revenue bonds.

The primary purpose of a corporate stock split is to: A dilute the reported earnings per share B reduce the market price of the stock to increase its accessibility to investors C avoid paying a cash dividend to shareholder D lower the risk of a takeover by increasing the number of shares outstanding

B reduce the market price of the stock to increase its accessibility to investors Corporations will split their stock when the market price gets too high, making the stock more accessible to investors.

All of the following are covered under the Securities Exchange Act of 1934 EXCEPT: A registration of broker-dealers B registration of new issues C stabilization of new issues D registration of exchanges

B registration of new issues The Securities Act of 1933 requires registration of non-exempt new issues. The Securities Exchange Act of 1934 requires registration of exchanges and their members with the SEC, and allows stabilization of new issues in the secondary market under prescribed conditions.

The SEC requires broker-dealers to do the following with fully paid securities: A segregate them only B segregate them and ensure they are safely kept C commingle the two D segregate only at the written request of the customer

B segregate them and ensure they are safely kept SEC Rule 15c3-3 pertains to the customer protection rule. Broker-dealers must segregate fully paid securities from other securities. In addition, the broker-dealer must take action to ensure these securities are kept safely.

For the year 2024, the maximum contribution that an individual under age 50 can make to an IRA is: A$6,000 B$7,000 C$8,000 D$9,000

B$7,000 In 2024, for an individual under age 50, the maximum contribution to an IRA is the lesser of 100% of income or $7,000.

Which of the following investments would not pay a dividend? A Common stock B Preferred stock C Corporate bond D Mutual fund

C Corporate bond Common and preferred stocks may pay dividends. Mutual funds may pay dividends as well as making capital gains distributions. Bonds pay interest.

Over a period of 18 months, prices of goods and services decrease by 2%, and market interest rates decrease by 3%. This signals that the economy is in a period of: A depression B prosperity C deflation D recession

C deflation When there is persistent inflation, asset prices increase and market interest rates rise. When there is persistent deflation, asset prices decrease and market interest rates fall. "Disinflation" is a decline in the inflation rate - so it means that the rate of inflation is decreasing. A recession is 2 consecutive quarters of GDP decline. A depression is 6 consecutive quarters of GDP decline.

ETFs are: A non-negotiable B redeemable C traded on exchanges D traded over-the-counter

C traded on exchanges Exchange Traded Funds, as the name says, trade on stock exchanges. Most are AMEX (now renamed the NYSE American) listed, but there are ETFs on the NYSE and Nasdaq as well.

In January, 20XX a customer buys 100 shares of ABC stock at $30 per share and pays a $1 commission per share. The customer receives $1 in cash dividends during the year. The customer's cost basis in the stock is: Responses A$29 per share B$30 per share C$31 per share D$32 per share

C $31 per share When the stock is purchased, any commission paid is not deductible - it is part of the cost basis of the shares. Thus, the cost basis for tax purposes is $30 + $1 commission = $31 per share. The $1 dividend received is included in taxable income for this year, and is not part of the stock's cost basis. Chapter 16: Economic Analysis and Tax Rules

A customer has opened the following accounts: Individual cash account Individual margin account Joint cash account with husband Custodial Account for minor child This is treated as how many "covered accounts" in an SIPC liquidation? A 1 B 2 C 3 D 4

C 3 Securities Investor Protection Corporation coverage is applied "per customer name." If a customer has both an individual cash and margin account, they are treated as one account. The joint account with someone else is treated as a separate account. Finally, the custodial account for a minor child is treated as a separate account.

All of the following statements regarding currency exchange rate risk are true, except: A The value of an international investment could be affected by changes in currency exchange rates. B Currency exchange rate risk may be heightened by an increase in regulatory risk. C A U.S. investor in a Japanese security benefits when the U.S. dollar strengthens against the Japanese yen. D Currency exchange rate risk may be heightened by an increase in political risk.

C A U.S. investor in a Japanese security benefits when the U.S. dollar strengthens against the Japanese yen. Exchange risk, also called foreign exchange risk or currency risk, is the risk that an investment in a foreign security may lose its value due to a strengthening of the U.S. dollar against the foreign country's currency. For example, imagine that you invest in a Japanese security that is trading on a Japanese exchange. If the dollar strengthens against the Japanese yen, you will get fewer American dollars when you sell your Japanese security.Political risk is associated with investments in foreign countries where the political process may be unstable (e.g., a country at risk of civil war). One of the effects of political risk is that it may heighten currency exchange rate risk.Regulatory risk is the risk that a regulator will make decisions that negatively affect an investment. Since exchange rates are affected by the decision of regulators, regulatory risk affects currency exchange rate risk. An example of increased regulatory risk resulting in increased exchange rate risk is if the Federal Reserve adopts a strong-dollar policy. If the Fed succeeds in strengthening the dollar against foreign currencies, this could harm U.S. investors in foreign securities.

Which of the following would not be suitable for someone interested in a safe, liquid investment? A A bank-issued CD B A Treasury bill C A municipal bond D A treasury inflation protected security

C A municipal bond Though each of the answer choices would be considered a low-risk security, a municipal bond is not considered a liquid investment. Bank-issued CDs and all Treasury securities are considered both safe and liquid investments.

All of the following must be disclosed on a U4 Form by an individual applying for registration with a member firm EXCEPT: A The individual's primary residence for the past 5 years B The individual's employers for the past 10 years C Any foreign bank accounts currently owned by the individual D If the individual has declared bankruptcy or is the subject to a financial judgment or lien on assets

C Any foreign bank accounts currently owned by the individual There is no requirement to disclose bank accounts on the U4 Form.On the U4, the individual must disclose residence addresses for the past 5 years (that way, if the authorities want to find that person, they know where to look!).The prior 10 years' employers must be disclosed. Note, however, that if the individual has declared bankruptcy or is the subject to a financial judgment or lien on assets, these must be disclosed.

If a regulated mutual fund pays out a dividend and capital gains distribution, which the shareholder has automatically reinvested, which statement is TRUE? A Only the dividend is taxable B Only the capital gain is taxable C Both the dividend and the capital gain are taxable D Neither the dividend nor the capital gain are taxable

C Both the dividend and the capital gain are taxable Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.

Which statement is TRUE about an introducing broker-dealer? A Introducing broker-dealers keep custody of customer funds and securities B Introducing broker-dealers send customers trade confirmations and statements of account C Introducing broker-dealers maintain their accounts at a clearing firm D Introducing broker-dealers cannot be FINRA members

C Introducing broker-dealers maintain their accounts at a clearing firm An "introducing" broker-dealer signs a clearing agreement with a clearing firm. The introducing broker-dealer "introduces" its accounts into the clearing firm, which keeps custody of client positions and which acts as the "back office." It is the clearing firm's responsibility to send trade confirmations and statements to the introducing firm's customers. Introducing firms do not hold customer funds or securities, and are subject to much lower net capital requirements. Any broker-dealer, whether it be clearing, introducing, or market making, must be a FINRA member.

A bond is rated BBB by Standard and Poor's. The bond is: A Highest Quality Investment Grade B High Quality Investment Grade C Lowest Quality Investment Grade D Highest Level Speculative Grade

C Lowest Quality Investment Grade A BBB rating is the lowest investment grade rating for a bond. The investment grade ratings are AAA, AA, A, and BBB.

A put option writer has the ________to _________shares of the underlying securities when the option is exercised. A Right; buy B Right; sell C Obligation; buy D Obligation; sell

C Obligation; buy The seller of a put option has the obligation, and not the right, to buy shares of the underlying securities from the put option holder when the option is exercised. The option would be exercised when the market price of the underlying security drops below the option's strike price. When the option is exercised, the put option writer needs to purchase shares of the underlying security from the option holder for the strike price. The option holder, and not the option writer, has the right to exercise the contract. Finally, the writer of a call option, and not the writer of a put option, has the obligation to sell shares of the underlying security to the option holder when the contract is exercised.

All of the following are differences between rights and warrants, except: A Rights expire after 2-4 weeks, whereas warrants expire after 2-10 years. B Rights are issued with a strike price below market price, whereas warrants are issued with a strike price above market price C Rights are issued with a new bond offering, whereas warrants are issued to a company's existing shareholders. DA company issuing new stock might issue rights, whereas a company issuing new bonds might issue warrants.

C Rights are issued with a new bond offering, whereas warrants are issued to a company's existing shareholders. Warrants are issued with a new bond offering, whereas rights are issued to a company's existing shareholders.

Under FINRA rules, all of the following are necessary to open a corporate account EXCEPT: A New account form B Corporate charter C Shareholder approval D Corporate resolution

C Shareholder approval To open a corporate account under FINRA rules, a new account form must be filled out, a copy of the corporate charter must be obtained (for proof of identity), and an authorizing resolution must be completed by the corporation. The resolution authorizes the opening of the account, names the persons who are authorized to trade, and is signed and sealed by the Secretary of the corporation. There is no requirement to obtain a proof of domicile (a document that shows under which State's laws the corporation operates).

Debentures are unsecured bonds backed by: A The full faith and credit of the United States government B Physical property or other real assets C The full faith and credit of the issuer D The full faith and credit of the third-party trust

C The full faith and credit of the issuer Debentures are unsecured bonds generally issued by well-established companies with high credit ratings and purchased in the belief that the issuer is unlikely to default. Debentures are unsecured bonds generally issued by well-established companies with high credit ratings and purchased in the belief that the issuer is unlikely to default.

Zero coupon bonds: A pay interest semi-annually B pay interest annually C are bought at a discount and mature at par D are bought at a par and mature at a premium

C are bought at a discount and mature at par Zero-coupon bonds are often called "capital appreciation bonds" since the bondholder does not receive annual interest payments from the issuer. Instead, the bonds are bought at a discount from par, and are redeemed at par at maturity (similar to savings bonds). The discount is earned over the life of the bond and is the "income" from this type of investment.

An underwriter wishes to enter a stabilizing bid on the NYSE for a new issue, whose price has been dropping from its inception. The stabilizing bid must be: A only at the public offering price B only with approval from the issuer C at or below the public offering price D at or above the public offering price

C at or below the public offering price Stabilizing bids must be placed at or below the public offering price (POP).

The voting process by which an investor may use their total number of votes (number of shares owned times number of seats) to vote for just one candidate even when there are multiple seats open is known as: A statutory voting B preferred voting C cumulative voting D common voting

C cumulative voting Common stockholders have voting rights on important matters such as electing the board of directors. Depending on the corporation, investors will use either statutory or cumulative voting. The total number of votes that an investor gets is the number of shares owned times the number of open seats on the board. Under cumulative voting, shareholders can allocate their total number of votes unevenly among the number of open seats. For example, if ABC company has four seats open on the board of directors, and an investor owns 100 shares of ABC company, this investor will get a total of 400 votes. The investor could allocate the 400 votes unevenly among the four seats, even choosing to use all 400 votes for a single candidate. Under statutory voting, an investor can only vote up to the number of shares owned for each open seat. So, in our example, the investor would only get 100 votes for each of the four seats.

The municipal bond counsel opines on all of the following EXCEPT: A validity B legality C feasibility D tax exempt status

C feasibility The bond counsel examines new municipal issues for legal or tax problems and renders an opinion on the validity, legality and tax exempt status of the issue. Bond counsels do not render economic opinions, which is the same as rendering an opinion on the feasibility of an issue.

An investor wishes to buy mutual fund shares that have investments in computer and high technology companies. Based on this information, the appropriate recommendation is a: A balanced fund B hedge fund C sector fund D dual purpose fund

C sector fund A sector fund invests in a specific industry or geographic area. Because of the lack of diversification, there is greater gain potential, as well as higher risk.

A type of brokerage account where the customer is charged a single annual fee for all account services, regardless of activity in the account, is known as a: A fiduciary account B active trader account C wrap account D omnibus account

C wrap account Wrap accounts are a type of customer account, where all services performed by the broker are "wrapped" into a single account; and a single annual fee based as a percentage of assets under management is charged. There is no commission charge for each transaction performed in such an account nor are charges imposed for safekeeping of securities. All services are covered in the single "wrap" fee.Also note that "wrap" accounts, because they charge a flat annual fee and not commissions, are defined as investment adviser products. These must be sold through an investment adviser subsidiary of a broker-dealer, and the representatives that sell them must be registered as "IARs" - Investment Adviser Representatives - in each state where they offer the product.

A customer buys 100 shares preferred at $110 per share. The par value is $100. The dividend rate is 5%. Assuming dividends are paid semi-annually, each dividend payment will be: A$250 B$275 C$500 D$550

C$500 The annual rate is 5% x $100 par value = $5 per share x 100 shares = $500. Assuming the preferred dividends are paid semi-annually, each payment is $250.

A customer has the following holdings in the ACME Fund Family: ACME Growth Fund:$225,000ACME Balanced Fund:$120,000ACME International Fund:$15,000 ACME Funds has the following breakpoint schedule: $0-$50,000 5% $50,001-$100,000 4% $100,001-$250,000 3% $250,001-$1,000,000 2% The customer wishes to buy another $60,000 of ACME Growth Fund. The sales charge that will be imposed is: A4% B3% C2% D0%

C2% Mutual fund breakpoints are applied to the entire "family" of funds offered by a sponsor. This customer has a total $360,000 investment in the ACME fund family. Another $60,000 purchase brings the customer's position up to $420,000; and the applicable breakpoint on the $60,000 purchase is 2% from the breakpoint schedule shown.

Customer account records must be updated at least every: A1 year B2 years C3 years D6 months

C3 years Customer account records must be updated at least every three years...however, the "at least" is very important. While the SEC requires broker-dealers to update suitability information at least every three years, the Know Your Customer obligation may require broker-dealers to update their customers' information more often in order to exercise "reasonable diligence."

A corporation is preparing a registration statement for a new issue offering consisting of 300,000 new shares and 200,000 existing shares held by officers. Which statement is TRUE? A Only the 300,000 new shares can be purchased on margin B Only the 200,000 shares previously held by officers can be purchased on margin C All 500,000 shares can be purchased on margin D None of the shares can be purchased on margin

D None of the shares can be purchased on margin Under FRB rules "new" issues are not eligible for margin until 30 days after the offering. The definition of a "new" issue for the purposes of this rule is a prospectus offering. Both the primary and secondary shares held by the officers are being offered through the prospectus; so no margin is permitted.

Under FINRA rules, an offeror is not allowed to give which kind of non-cash compensation? A reimbursement for the cost of an all-day educational seminar about mutual funds attended by a registered representative of a member firm B golf balls with the issuer's logo on them C a movie ticket D dinner contingent on achieving a certain target goal

D dinner contingent on achieving a certain target goal Offerors are restricted in the type of non-cash compensation that they can give to registered representatives or their member firms. Promotional items with the company's logo are allowed. Small, occasional gifts, meals, or entertainment are also allowed as long as they do not occur on a regular basis or are contingent on meeting a sales target. Reimbursement for educational expenses is allowed as long as they meet specific conditions, such as the majority of the time should be educational and they are not contingent on meeting a certain target goal.

Which tool would be used by the Federal Reserve to control inflation? A Adjusting tax rates B Adjusting the level of government spending C Adjusting the balance of payments D Adjusting the discount rate

D Adjusting the discount rate Fiscal policy is set by Congress. It includes setting the level of government spending, setting tax rates, and setting the level of transfer payments such as social security payments. The balance of payments (level of imports versus the level of exports) is also influenced by fiscal policy. The Federal Reserve sets monetary policy. Tools of the Fed include setting reserve requirements, open market operations, setting the discount rate, and setting margin rates. To memorize the 4 tools of the Fed, remember "DORM." D is Discount rate; O is Open Market Operations; R is Reserve Requirements; and M is Margin on securities.

Your customer is short 100 XOM at $75, and wants to hedge his position. To protect them from the risk that XOM's stock price may rise, you recommend that they: A Buy a put B Sell a put C Sell a call D Buy a call

D Buy a call In this question, the investor is going for protection and is not seeking income, so the best answer is to buy a call. The call allows the investor to buy the shares at a particular fixed price, no matter how high the stock price goes, protecting the investor's position. While selling a put is a possible hedge, it is not the most appropriate hedge for this investor's goal.

Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would NOT generally inquire about the customer's: A Existing investment holdings B Current investment objective C Financial situation and needs D Daily living expenses

D Daily living expenses "Suitability" means that securities which are recommended to a customer are appropriate for that customer. To ascertain which investments are suitable for the customer, FINRA states that the basis for making the recommendation are the facts disclosed by the customer about his or her other security holdings and financial situation and needs. Inquiry should be made as the customer's investment objective, tax status, and financial status. Inquiring about the customer's daily living expenses might be a little too intrusive to ask.

All of the following would have to be reviewed by a principal EXCEPT: A Letters recommending securities to all clients of a registered representative B Complaint letters received from customers C Form letters mailed to all customers D Form letters for internal use within a firm

D Form letters for internal use within a firm FINRA defines Communication with the Public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites Internal documents of a brokerage firm do not have to be reviewed by a manager or principal. Because the public does not see these, FINRA is not concerned with their content. All customer complaint letters must also be reviewed and handled by a principal.

In order to adequately assess the suitability of a recommendation to a customer that is a senior citizen, the member should make reasonable efforts to obtain all of the following information about the customer EXCEPT: Responses A Age B Life stage C Liquidity needs D General health status

D General health status In its suitability rule, FINRA does not explicitly address the needs of senior citizens. However, in a separate notice to members, FINRA has stated that a customer's age and life stage are both important factors when performing a suitability determination for a senior citizen. It states that as investors age, their investment time horizons, goals, risk tolerance and tax status often change, and that liquidity takes on added importance. General health status has nothing to do with suitability.

Jenny is an employee of a broker-dealer. She is a receptionist at the firm and is not a registered representative. She would like to purchase shares in an IPO that she has recently heard about at her office. Her firm is not involved in the IPO. Which of the following BEST describes her participation? A Jenny may purchase shares of the IPO on the same basis as other customers. B Jenny is prohibited from purchasing shares of the IPO, but her spouse who she supports may purchase shares on the same basis as other customers. C Jenny may purchase shares of the IPO as long as the purchase quantity doesn't exceed 200 shares.. D Jenny is prohibited from purchasing shares of the IPO.

D Jenny is prohibited from purchasing shares of the IPO. FINRA Rule 5130 - Restrictions on the Purchase and Sale of Initial Equity Public Offerings - prohibits a member firm (broker/dealer) from selling shares of an IPO to an account in which a "restricted person" has a beneficial interest, subject to certain limited exceptions. All employees of a broker-dealer are considered "restricted persons" under the rule. Note that the broker-dealer does not need to be involved in the IPO for this rule to apply.

A high yield is characteristic of a: A Municipal bond B Convertible bond C Zero-coupon bond D Junk bond

D Junk bond A high yield is characteristic of a junk bond. Corporations issuing junk bonds generally have lower credit ratings with a higher risk of default. The higher the risk of the bond, the higher the yield the company offers on their bonds.

Mr. Jones, a New York resident, is a widower with a 6 year old son. He opens an account for the son under the Uniform Gifts to Minors Act. Three years later, Mr. Jones remarries, and moves to California, a community property state. Under what conditions can Mrs. Jones enter orders into the UGMA account? A Only if a power of attorney is granted by the son B Only if a power of attorney is granted by Mr. Jones C Mrs. Jones can enter orders without restriction because California is a community property state D Mrs. Jones can not enter orders into the account under any circumstances

D Mrs. Jones can not enter orders into the account under any circumstances Custodial accounts are not permitted to have "third parties" that can trade the account. Only the custodian can enter orders. If the wife wishes, she can open a separate custodial account for the minor. The fact that California is a community property state is irrelevant to this question.

Which statement is TRUE about the FINRA 5% Mark-Up Policy? A Secondary market transactions are required to have a 5% mark-up B Secondary market transactions are required to have a mark-up that is lower than 5% C Secondary market transactions must have a mark-up that is at least 5% D Secondary market transactions can have a mark-up that is either more or less than 5%

D Secondary market transactions can have a mark-up that is either more or less than 5% The FINRA 5% Mark-Up Policy applies to transactions in the secondary (trading market), with the exception of municipals, which are covered under a similar MSRB rule. It states that 5% is a guide - not a rule. The actual mark-up charged depends on the specifics of the transaction. Easy-to do transactions should be charged less; hard-to-do transactions can be charged more. The rule is also a misnomer, because it applies to both principal transactions where a mark-up is charged, and agency transactions where a commission is charged.

A registered representative employed by ABC broker/dealer is good friends with an independent venture capitalist. The venture capitalist asks the registered representative to obtain investors for a private placement that he is forming. Which statement is TRUE? A The registered representative can direct customers to the private placement since this is an exempt transaction B The registered representative cannot direct customers to the private placement since his broker-dealer is not the private placement sponsor C The registered representative can direct customers to the private placement only if the venture capitalist is a member of FINRA D The registered representative can direct customers to the private placement only with the prior written approval of his employer

D The registered representative can direct customers to the private placement only with the prior written approval of his employer Under FINRA rules, registered representatives are prohibited from effecting "private securities transactions." As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one's agency capacity.However, FINRA does allow an exemption from this prohibition. If a registered representative: provides written notice to the member of the transaction, and details in writing any compensation to be received, and obtains express approval in writing from the member firm, then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.

A change in each of the following is a leading economic indicator EXCEPT: A new consumer goods orders B building permits C initial claims for unemployment D index of industrial production

D index of industrial production The index of industrial production is a coincident economic indicator, since it is shows output levels as this occurs. Initial claims for unemployment (high levels indicate future production cutbacks), building permits (since the buildings will be built in the coming months, this shows future production levels), and new consumer goods orders (showing future production levels) are all leading indicators.

Shareholders in a management company have all of the following rights EXCEPT the right to vote: A to change the investment objective of the fund B for the investment adviser C for the Board of Directors D on the dividend distribution amount

D on the dividend distribution amount Shareholders in a management company have the right to vote for the Board of Directors; to vote for changes in the investment objective; to vote annually on the investment adviser; and to receive semi-annual and annual reports. The dividend distribution is not decided on by the investors of the fund - it is decided by the Board of Directors.

In order to recommend a variable annuity to a customer, the representative must inform the customer, in general terms, about all of the following EXCEPT: A potential surrender period and surrender charge B potential tax penalty potential tax penalty C mortality and expense fees D premium reductions available for enhanced riders

D premium reductions available for enhanced riders Enhanced riders increase the premium cost - they do not reduce premium cost! Consider this to be a learning question. To recommend a variable annuity, the representative must have a reasonable basis to believe that the customer has been informed, in general terms, about the material features of the variable annuity. These include the potential surrender period and surrender charge, potential tax penalty, mortality and expense fees, charges for and expenses of enhanced riders (a very popular rider, at a cost, is a GMIB - a Guaranteed Minimum Income Benefit), insurance and investment components and market risk. Enhanced riders increase the premium cost - they do not reduce premium cost!

A customer purchases 10,000 shares of AAA stock. To protect the position, she should: A purchase 10 AAA call options B purchase 100 AAA call options C purchase 10 AAA put options D purchase 100 AAA put options

D purchase 100 AAA put options In order to hedge a long stock position against a downside market move, the best choice is to buy a put. The long put option allows the holder to put (sell) the stock at the exercise price if the market falls - protecting the stock position from downside market risk. Note: The client would need to buy 100 puts to hedge the 10,000 shares since each put would protect 1 round lot or 100 shares of stock. (100 puts x 100 shares each =10,000 shares protected)

Janice buys 1 XYZ Mar 20 put for a premium of $2. At the same time, she buys 100 shares of XYZ stock for $20 per share. If Janice decides to sell her 100 shares of XYZ when the put expires, at which per-share price does XYZ need to be trading for her to avoid losing money on her investment? A$2 B$18 C$20 D$22

D$22 "avoid losing money " - break even Janice pays $200 for her put options (100 shares in an options contract x $2 per share). Thus she would need the proceeds from her sale of XYZ stock to produce a $200 gain to counteract the amount she has paid out. Since she purchased 100 shares, this means the market value of the stock needs to be $2 higher when she sells it than it was when she bought it (100 shares x $2 = $200). So Janice would need the stock to be trading at $22 per share when her options contract expires to break even on her investments.

Shares of the mutual fund ZZY require a 5% sales charge. Excluding any other fees, what is the NAV if shares trade at $24.55? A$25.77 B$12.28 C$23.01 D$23.32

D$23.32 If shares are trading at $24.55 which includes a 5% sales charge but excludes any other potential fees the NAV must be $23.32. This is derived from 24.55 * .95 = 23.32.