SIE: Unit 1 Checkpoint Exam

16. The current quote for PQR Inc. common stock is bid 42, ask 42.10, 4 x 5. A customer who places an order to buy 200 shares at the market will likely pay how much for the purchase?

a) $8,400 b) $4,210 c) this cannot be determined based on this quote d) $8,420 You answered the question incorrectly and said the answer was B. The correct answer is D Your customer will likely buy at the ask (42.10) or very close to it. The ask size is 500 shares, so the market can absorb the entire order (42.10 x 200 = $8,420). Customers who are selling receive the bid. Those who are buying pay the ask. The size shows bid x ask: 400 shares may be sold at 42 and 500 shares are available to buy at 42.10.

13. Which of the following securities are exempt from the Securities Act of 1933

a) 30 year AAA corporate bonds b) treasury notes c) treasury bond funds d) common stock You answered correctly and said it was B. Securities issued by the government are exempt from the Securities Act of 1933. A mutual fund that invests in these securities is not.

4. A client entering a sell limit order at 43 would accept which of these trades

a) 42.90 b) 42 c) 44 d) 42.50 You answered the question incorrectly and said it was B. The correct answer is C. A sell limit at 43 means the investor will only accept a price of 43 or better (higher). Certainly, if the client is willing to sell at 43, she would be even happier to receive 44.

27. A bearish sentiment means that a person believes

a) the security will decline in value b) the firm appears to be slow and lumbering c) the security will increase in value d) the company will devour its competition You answered the question correctly and said it was A. Bearish means one believes the security will decline in value.

9. Cypress Care Nurseries, Inc., owns and operates a chain of nurseries and is headquartered in Cypress, California. The company is considering selling shares of the company to the public in California. In order to be exempt from registration with the SEC, under Rule 147 it would need to meet several criteria. Which of these is not a listed criterion under Rule 147?

a) 80% of the issuer's assets are located in the state of California b) 80% of the issuer's proceeds will be used in the state of California c) 80% of the issuer's customers must be located in the state of California d) 80% of the issuer's revenue must be generated from the state of California You answered the question correctly and said it was C. The 80% rule is that the company must meet at least one of the three 80% rules: 80% of revenue from the state, 80% of the proceeds earmarked for the state, or 80% of company assets in the state. The rule is the percentage of revenue, not the percentage of customers, from the state. Theoretically Cypress could have a majority of its customers from outside the state, so long as it has a few large customers generating at least 80% of revenue within the state it meets the requirement of Rule 147.

18. On Friday, July 1 your customer purchased 10 3% T-bonds maturing in 15 years.

a) July 5 b) July 2 c) July 3 d) July 6 You answered the question incorrectly and said was d. The correct answer is a. Treasuries settle T+1 (next business day after the trade). A trade on Friday would normally settle on Monday, but this Monday is a holiday (Independence Day). Remember the July 4 and December 25 are not settlement days.

10. On Monday, August 1, your customer purchased 10 Treasury notes at a price of 99.5 that mature in 3 years. Cash to pay for the purchase must be delivered by what date?

a) Monday, August 1 b) Tuesday, August 2 c) Wednesday, August 3 D) At maturity You answered the question incorrectly and said it was C. The correct answer is B. Trades for government securities settle in one business day.

21. Ron buys 522 shares of Narcissus, Inc., common stock in a cash amount on Monday, March 19. He deposits cash in the account sufficient to cover the trade on March 20. How soon would he be able to withdraw those shares?

a) Wednesday, March 21 b) Thursday, March 22 c) Tuesday, March 20 d) Friday, March 23 You answered the question incorrectly and said it was B. The correct answer is A. This is a regular way settlement of a corporate security (T+2). The trade is fully paid for so the customer may request the shares be moved on or after settlement on Wednesday, March 21..

6. Your customer is quite nervous about the stock market but expresses his belief that equities are still the place to save for retirement over the long term. He places a trade for 500 shares of an equity index fund. Overall your customer is likely

a) a bull b) a bear c) a tiger d) unsure of where the market is going You answered the question correctly and said it was A. The customer has expressed confidence in stocks and has invested money to back up his belief. He is not confused at all. He recognizes that the equities can produce nerve-wracking consequences but have the best record of long-term growth, he is a bull.

2. A broker-dealer that concentrated its business efforts on proprietary trading would most likely be functioning as

a) a market maker b) an investment adviser c) an underwriter d) an investment banker You answered the question correctly and chose D When a broker-dealer buys and sells securities for its own account as the major portion of its business model (e.g., proprietary trading), it is functioning primarily as a market maker (i.e., making markets in those securities). Investment banking and underwriting both primarily involve assisting issuers with bringing new securities issues to public investors. Investment advisers sell advice, they do not trade securities

7. Modulux, Inc., a NYSE listed manufacturing company, was founded by Clarence Mod. Clarence is now 82 years old and is looking to divest his significant interest in Modulux to capitalize the Mod Family Foundation, a charity. He has enlisted the help of Seacoast Securities, a regional investment banker based in Seattle, to run the sale. This is an example of

a) a secondary offering b) an APO C) an IPO d) a CRUT You answered the question correctly and said it was A. The shares that are to be sold belong to a person (Clarence Mod), not the issuer. This is a secondary offering. An APO or an IPO both issuer transactions. A charitable remainder unitrust (CRUT) is an estate planning tool often sued but the wealthy, but is not something you are likely to see on this exam

15. Which of these broker-dealers would be most likely have correspondent firms?

a) a self-clearing firm b) a market maker c) a fully disclosed broker-dealer d) an introducing broker-dealer You answered incorrectly and said the answer was D. The correct answer is A. A self-clearing (or carrying) firm holds funds and securities of the fully disclosed or introducing firm's customers and performs related functions, such as sending confirmations and statements for them. Those firms, for whom the carrying firm performs those services, are known as its correspondents.

Modulux, Inc., a NYSE listed manufacturer, is offering 5 million shares to the public, which will raise capital to build a new plant. The new technology and design should allow Modulux to increase market share significantly in the modular home business. This offer is

a) an IPO b) a secondary offering c) an APO d) a venture offering You answered the question incorrectly and said it was A. The correct answer is C. There are two important points to consider (1) this is an offering of stock to raise money for the issuer, which is (2) a primary transaction. The company's stock is actively trading in the secondary markets so this must be additional shares. This is an additional public offering (APO).

14. ABC broker-dealer maintains an inventory of MMNO common stock. They transact purchases and sales with customers using this inventory. In this example, ABC is acting as what?

a) an agent b) a market maker c) a broker d) a transfer agent You answered incorrectly and said it was A. The correct answer is B. Broker-dealers who incorporate proprietary trading into their business model are known as market makers. As a market maker, the broker-dealer trades in their own account attempting to profit. A firm making markets may be a carrying firm or a fully disclosed firm. Commissionable transactions are those done by brokers for customer accounts not proprietary trades.

22. Which of the following is not part of the secondary markets?

a) third market b) over-the-counter market c) mutual fund market d) the exchanges You answered the question incorrectly and said the answer was B. The correct answer is C. Mutual funds, as open-end investment companies, do not trade in the secondary markets.

5. Seacoast Securities, a broker-dealer member firm, maintains an inventory of SFT common stock. The firm assists a customer with a purchase of SFT common stock and charges a commission for the service. Seacoast is acting in what capacity?

a) as a market maker b) as a broker c) as a principal d) as an underwriter You answered the question correctly and said it was B. Broker-dealers who incorporate proprietary trading into their business model are known as market makers. As a market maker, the broker-dealer trades in their own account attempting to profit. A firm making markets may be a carrying firm or a fully disclosed firm. However, in this example, the trade was not in a stock in which the firm makes a market. They charged a commission. Commissionable transactions are those done by brokers for customer accounts not proprietary trades.

11. A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction is called a

a) broker-dealer b) transfer agent c) clearing agency d) depository You answered the question correctly and said it was C. This is the function of a clearing agency. Although there are some broker-dealers that do act as clearing agents, being a broker-dealer does not always include providing the services of a clearing agent. The broker-dealer would need to meet all of the requirements of being a clearing agent.

24. Narcissus, Inc., a social media company, has shares selling at $52. Your customer likes the company but thinks it is currently a bit too high and would like to buy the stock if the price declines to $50 per share. Which of the following orders meets this customer's request?

a) buy limit @ 50 b) buy stop at 50 c) buy stop at 55, limit 50 d) buy puts with a 50 strike You answered the question incorrectly and said it was C. The correct answer is A. This order instructs the broker to buy at a price of $50 or better. Entering a buy stop at 50 would trigger the order immediately, becoming a market order to buy at the current price. The stop limit would not trigger until the stock rose to 55, then it would be an order to buy at 50, so the stock would have to rise at least 55 then drop to 50 or below. Owning the put gives him the right to sell the stock at the strike of 50, not buy it.

8. Which of the following activities would be handled by a carrying firm and not an introducing firm?

a) issuing statements for customer accounts b) holding custody of a customer's securities c) answering customer inquiries d) soliciting trades You answered the question correctly and said it was B. Holding customer assets is a task handled by a carrying firm rather than an introducing firm. All of the other activities listed here are common to all broker-dealers.

25. An order that when triggered becomes a limit order is called a

a) market order b) stop order c) limit order d) stop limit order You answered the question correctly and said it was D. An order that triggers the entry of a limit order is a stop limit order. A stop order triggers a market order.

19. Both the individual and institutional investor are able to easily buy and sell securities to meet their objectives through

a) primary markets b) biennial markets c) outdoor malls d) secondary markets You answered the question incorrectly and said it was A. The correct answer is D. This is the primary purpose of the secondary markets.

1. During the cooling-off period the disclosure document that may be delivered to interested parties is called the

a) summary prospectus b) final prospectus c) cool off period prospectus d) preliminary prospectus You answered the question correctly and chose D The document available during the cooling-off period in the preliminary prospectus, also called a red herring

20. Secondary markets exist to do all of these except

a) support the existence of primary markets b) decrease liquidity in the national markets c) allow individual investors easy access to investment vehicles d) allow investors to easily liquidate securities You answered the question correctly and said it was B. Secondary markets are focused on providing, not decreasing liquidity. Ultimately, a fair and orderly secondary market makes securities more attractive, supporting the functioning of the primary markets.

23. All of the following are exempt issuers except

a) the city of Alta Loma b) Alta Loma Community Foundation c) the Southwest Railroad Co. d) Modulux, Inc., a home manufacturer You answered the question incorrectly and said it was B. The correct answer is D. Common carriers (railroads), municipalizes, and charities are all examples of exempt issuers under the Securities Act of 1933. A for-profit corporation is not exempt.

12. Seacoast Securities is a syndicate member for the initial public offering of WeariTech, Inc., WeariTech is a hot new issue in the wearable technology space. The S-1 registration statement has been filed but the effective date has not yet been released. This is

a) the cooling-off period b) the posteffective period c) the mandated waiting period d) the pre-filling period You answered correctly and said it was A. The period of time after the offering is filed, but before the SEC releases the security for sale, is called the cooling-off period

3. The ABC Chemical Corporation wishes to advertise its upcoming offering of common stock in a tombstone advertisement that they, the issuer, will place. When placing the tombstone advertisement, which of the following would be least likely to appear?

a) the name of the issuer b) the total number of shares being offered c) the names of the investment bankers underwriting the issue d) the expected price range of the offering You answered the question incorrectly and said it was C. The correct answer is B. In most cases, the names of the firms underwriting the issue only appear in the tombstone ad when they, rather than the issuer, have placed the ad. In this instance, with the tombstone advertisement placed by the issuers, the names of the underwriters would not likely appear.

17. a corporation seeking to raise funds in order to expand its manufacturing capacity would do in

a) the secondary market b) the currency market c) the capital market d) the funding market You answered the question correctly and said it was C. Raising new capital is generally accomplished through the issuance of stock (equity capital) or bonds (debt capital). This is done in the capital market. When an issuer offers stock and the proceeds from the sale are added to the company's capital, it is called a primary offering. By contrast, a secondary offering is one in which one or more shareholders in the corporations sell all, or a portion of their equity holdings to the public. The proceeds of a secondary offering are paid to the selling shareholder(s), not the company.