STC Series 7 Final Exam 6
If a temporary hold has been placed on a customer's account, the firm: A. Must provide notice to the account owner and the trusted contact person B. Must provide notice only to the account owner C. Must provide notice only to the trusted contact person D. Must provide notice to FINRA
A. Must provide notice to the account owner and the trusted contact person If a temporary hold is placed on a customer's account (i.e., for a specified adult), the firm is required to notify both the account owner and the trusted contact person by no later than two business days after the hold has been placed.
A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a: A. $500 profit B. $500 loss C. $1,000 profit D. $1,000 loss
B. $500 loss The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 - $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put - $500 premium).
Which of the following choices would be the MOST advantageous tax benefit that an investor will receive from an oil and gas direct participation income program? A. Do so with the written approval from the customer B. Do so with verbal approval from the customer C. Do so based on having discretionary authority D. Do so if the principal considers the investment to be suitable
A. Do so with the written approval from the customer Due to the complex and risky nature of the investment, limited partnerships cannot be purchased in an account by a person who holds discretionary authority over the account. Instead, the customer's written approval must be obtained before making the investment.
An investor buys $10,000 par value of 4% Treasury bonds due July 1, 2040. For tax purposes, the interest earned on these bonds is: I. Subject to federal income tax II. Exempt from federal income tax III. Subject to state income tax IV. Exempt from state income tax A. I and III B. I and IV C. II and III D. II and IV
B. I and IV Interest on U.S. government bonds is subject to federal income tax but exempt from state income tax. This is just the opposite of the tax treatment on municipal (state) bonds where the interest is exempt from federal tax, but may be subject to state tax.
For the buyer of an option, the premium paid is considered the: A. Leveraged price B. Maximum risk C. Maximum reward D. Breakeven point
B. Maximum risk For the buyer of an option, the premium paid represents the maximum loss (risk). On the other hand, for the seller of an option, the premium received represents the maximum gain.
Unless registration is delayed, the effective date of a registration statement is generally on the: A. 10th day after the registration statement is filed B. 10th business day after registration statement is filed C. 20th day after the registration statement is filed D. 20th business day after the registration statement is filed
C. 20th day after the registration statement is filed Although there are exceptions, unless registration is delayed, the registration statement is effective on the 20th day after filing.
Signatures of which tenants must be obtained when opening a joint account? A. Only one, the tenant with authority to trade in the account. B. Only one, the tenant with the greatest percent interest in the account. C. All tenants, but only one has authority to trade in the account. D. All tenants, and all have authority to trade in the account.
D. All tenants, and all have authority to trade in the account. When opening a joint account signatures of all tenants must be obtained. In addition, all tenants have the ability to trade in the account, but if securities are liquidated the check must be payable to all tenants.
Prior felony convictions must be disclosed on Form U4 if the conviction occurred: A. Within the last 2 years B. Within the last 5 years C. Within the last 10 years D. At any time
D. At any time Any person filing Form U4 is required to disclose all felony convictions regardless of when they occurred. The person seeking registration will be statutorily disqualified if the conviction was within the last 10 years. The person may be registered if she requests and receives permission at a special hearing.
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be: A. $1,051.25 B. $1,052.40 C. $1,054.00 D. $1,057.50
D. $1,057.50 U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price: Step 1: 105.24 is equal to 105 24/32 Step 2: convert 24/32 into a decimal, which is .75 Step 3: convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay $1,057.50.
A corporation has a 9% cumulative preferred stock issue outstanding. The company paid a $7 dividend two years ago and $8 last year. If the company wants to pay a common stock dividend in the current year, the cumulative preferred stockholders must first receive a dividend of: A. 0 B. $3 C. $9 D. $12
D. $12 The cumulative preferred stockholder should receive a yearly dividend of $9. Since it's a cumulative issue, any dividend that's not paid (in arrears) must be made up prior to a common dividend being paid. If a common dividend is to be paid in the current year, the cumulative preferred stockholders must first receive $12 ($2 missed from two years ago plus $1 missed from last year plus the full $9 for the current year).
An investor makes an opening sale of 10 option contracts when the bid price was $7.00 and the offer price was $7.10. Later in the day, the investor makes a closing purchase of 10 contracts when the bid price was $6.50 and the offer price was $6.55. Assuming both trades were market orders, what is the investor's gain or loss on these transactions? A. $600 capital loss B. $600 capital gain C. $450 capital loss D. $450 capital gain
D. $450 capital gain An investor who places a market order will normally buy at the offer and sell at the bid. In this case, the investor sold 10 contracts at the bid price of $7.00, for sales proceeds of $7,000 (10 contracts x $700 per contract). To close out the position, the investor bought 10 contracts at the offer price of $6.55, for a total cost of $6,550 ($655 x 10 contracts). The $450 capital gain is based on the difference between the cost basis and sales proceeds.
If an issuer's convertible bonds are converted by bondholders, what is the effect on the issuer's outstanding common stock? A. It will no have no effect. B. It will decrease the number of outstanding shares. C. It will provide existing shareholders with a larger dividend. D. It will increase the number of outstanding shares.
D. It will increase the number of outstanding shares. If an issuer's convertible bonds are converted into stock, the immediate impact is an increase to the number of outstanding shares. The conversion of the bonds does not change the dividend payment being made to existing shareholders.
Regarding cash dividends, which of the following statements is TRUE? A. A cash dividend becomes a current liability when it is declared B. The amount of the dividend may never exceed the current earnings of the corporation C. Cash dividends must be paid if the earnings for the year exceed the amount of the regular quarterly dividend D. Dividend income may be offset by capital losses
A. A cash dividend becomes a current liability when it is declared Of the choices given, the only true statement is that a cash dividend becomes a current liability when it is declared.
Which of the following securities is NOT quoted on the Consolidated Quotation System (CQS)? A. A security on the Pink Sheets B. A NYSE-listed convertible bond C. A NYSE ARCA-listed warrant D. An AMEX-listed right
A. A security on the Pink Sheets The Consolidated Quotation System provides quotations for listed securities that are traded in markets outside the primary marketplace where the security is listed. For example, an NYSE- or AMEX-listed security trading in the OTC market is quoted on the CQS. A security that does not meet the listing requirements of Nasdaq is referred to as an OTC equity security and is quoted on either the OTC Bulletin Board (OTCBB) or on the Pink Sheets. These securities are not quoted on the CQS.
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? A. Agent B. Principal C. Market marker D. Underwriter
A. 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 name of a trusted contact person should be requested for which of the following accounts? A. An account for a senior investor B. An account for a minor C. A margin account D. An options account
A. An account for a senior investor When opening a brokerage account for a customer who is considered a specified adult, the name of a trusted person should be requested. A specified adult is defined as a senior investor (age 65 or older) or a person who is age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders him unable to protect his own interests.
Which of the following choices is a valid reason for a carrying broker to protest an account transfer request? A. An account title mismatch B. A nontransferable asset C. An unsatisfied margin balance D. An unsettled trade
A. An account title mismatch A carrying broker may protest an account transfer if the basic account information, such as the tax ID number, account title, or account number does not match the information that is on record at the carrying broker. With the necessary corrections, the instructions may be amended and the account transfer process can again be requested using the Automated Customer Account Transfer Service (ACATS) system. The carrying broker must either reject or validate the transfer within one business day of receiving the instructions and transferred within three business days following the validation.
A client buys 5 EW April 75 puts and sells 5 EW April 80 puts. This type of strategy is: A. Bullish B. Bearish C. Volatile D. Neutral
A. Bullish By buying and selling put options with the same expiration month and different exercise prices, the client is creating a vertical (price) spread. Since the put option being sold has a higher strike price, and the right to sell a security (put) at a higher price is more valuable, this option will have a higher premium. This is a put credit spread and the client will profit if the underlying security rises (bullish).
A U.S. corporation has contracted to buy machinery from a Japanese company and pay in Japanese yen. The payment date is in June. What basic option strategy will the U.S. corporation employ to protect itself against an increase in the yen? A. Buy JY calls B. Sell JY calls C. Buy U.S. dollar puts D. Buy U.S. dollar calls
A. Buy JY calls The U.S. corporation, in order to protect itself against an increase in the Japanese yen (which it currently does not own), would buy JY call options. If the Japanese yen should increase in value by payment date for the machinery, the U.S. corporation could either liquidate the call or exercise the options. The profit on the options will help to offset the loss on the rising value of the yen. The cost of this insurance to the U.S. corporation is the premium paid for the calls. If the yen does not increase in value, the most the corporation could lose is the premium paid. There are no listed options on the U.S. dollar. (71828)
If an analyst wants to determine a company's ability to pay its liabilities that will be maturing in one year with its liquid assets, he will be most interested in the: A. Current ratio B. Acid-test ratio C. Inventory turnover D. Debt-to-equity ratio
A. Current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period and is used as an indicator of a company's ability to pay those liabilities. On the other hand, the acid-test (quick asset) ratio excludes the company's inventories and is usually for a one- to three-month period.
On the day prior to the ex-dividend date for an ordinary cash dividend, a holder of a call tenders an exercise notice. The investor will be: A. Entitled to the dividend B. Required to pay the dividend to the writer only if the writer owns the underlying security C. Entitled to the dividend only if the holder owns the underlying stock D. Required to pay the dividend to the writer
A. Entitled to the dividend The holder of a call will get a dividend only if the option is exercised prior to the ex-dividend date. This will result in the buyer being listed as holder of record on the books of the transfer agent.
The federal tax exemption for interest earned on an industrial revenue bond is NOT available if the: A. Holder of the bond is a substantial user of the facility B. Issuer does not subscribe to equal opportunity employer standards C. Bonds are not approved by the MSRB D. Underwriter has a control relationship with the issuer
A. Holder of the bond is a substantial user of the facility If the holder of an industrial revenue bond is a substantial user of the facility, then the federal tax exemption on the interest earned does not apply.
Which TWO of the following activities would require special disclosure documents? I. Penny stock trading II. Trading in high-yield bonds III. Day trading IV. Online trading A. I and III B. I and IV C. II and III D. II and IV
A. I and III Regulators have singled out penny stock investing and day trading as presenting significant risks that warrant providing special risk disclosure documents.
Various tranches of a long-term speculative bond issue are called by the issuer. The effect on the remaining outstanding bonds is likely to be: A. Improved quality B. Decreased quality C. Making them eligible for investment by banks D. Increased interest payments
A. Improved quality When part of an issue of long-term speculative bonds is called, the effect on the remaining outstanding bonds will be an improvement in their quality. The issue will have less debt outstanding and there will be less interest charges to pay, which improves the quality of the issue.
A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if: A. Interest rates are falling B. Interest rates are rising C. Interest rates are stable D. The yield curve slopes downward
A. Interest rates are falling The call protection provision of five years would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, outstanding bond prices will rise. Issuers of bonds will call or retire bonds when interest rates decline, and will issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.
A corporation intends to raise additional funds from its existing shareholders rather than use the services of an underwriter. The corporation is engaging in a: A. Rights offering B. Secondary distribution C. Special offer D. Private placement
A. Rights offering The corporation is engaging in a rights offering. It will issue rights to all existing shareholders enabling them to subscribe to new stock below the current market price of the outstanding securities, thereby saving the corporation the costs involved in using an underwriter.
Which of the following statements about technical analysis is TRUE? A. The advance-decline index is a good indicator of the strength of a bull or bear market B. The odd-lot theory states that the small investor is usually right C. It is bullish when volume is heavy in a declining market and bearish when volume is light in an advancing market D. A small short interest tends to make for a technically strong market
A. The advance-decline index is a good indicator of the strength of a bull or bear market The advance-decline index is a measurement of advancing stocks versus declining stocks over a specified period. It is a good indicator of the strength of a bull or bear market. The other technical analysis theories are just the opposite of how they should be stated.
On the NYSE, an investor enters an order to buy 400 shares of HRJ at $56 per share. Which of the following statements is TRUE regarding this order? A. The order may be partially filled B. The order must be executed in its entirety or not at all C. The order must be executed immediately or cancelled D. An order must be executed at $56 before this order can be executed
A. The order may be partially filled Since the order specifies a price, it is a limit order. A limit order may be executed at the limit price or better. In this question, the investor is wants to buy HRJ at $56 or lower (i.e., the order is not required to be executed at exactly the limit price). Since the order does not indicate an all-or-none (AON) qualifier, a portion of the order may be filled. Also, since the order does not indicate an immediate-or-cancel (IOC) qualifier, it is not required to be executed immediately. As for the remaining choice (an order must be executed at $56 before this order can be executed), an order is not required to be executed at $56 for this order to receive execution.
Investors may receive disclosure and secondary market information concerning municipal securities: A. Through the EMMA system B. Through the TRACE system C. Directly from the issuer D. From the OATS system
A. Through the EMMA system The MSRB has established the Electronic Municipal Market Access (EMMA) system as the primary market disclosure service for official statements, other related primary market documents, and information. The EMMA system also contains information related to the continuing disclosure requirements submitted by municipal issuers and secondary market transactions submitted by municipal securities dealers. EMMA receives transactional information from the MSRB's Real-Time Transaction Reporting System (RTRS).
May a brokerage firm place a temporary hold on the transfer of securities? A. Yes, for the account of any investor. B. Yes, for the account of a senior investor. C. No, since this is beyond the scope of SRO rules. D. Yes, if the customer has a margin account.
A. Yes, for the account of any investor. FINRA rules permit a brokerage firm to put a temporary hold on the disbursements or transfers of funds and securities, but not on securities transactions. The temporary hold only applies to the account of a specified adult. A specified adult is a person who is age 65 or older or a person who is age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders her unable to protect her own interests.
An individual purchases $100,000 face value of a 6% municipal bond at a dollar price of 101 1/2. The bond's maturity is 7-1-27, but the issue has been called for redemption on the first call date of 7-1-15 @ par. The customer's confirmation should show the: A. Yield to call B. Yield to maturity C. Taxable equivalent yield D. After-tax yield
A. Yield to call Since the bond has been called, the yield to the call must be shown because the maturity is no longer of importance. Taxable equivalent yield and after-tax yield are never shown since the investor's tax bracket and/or capital gains rate cannot be accurately predicted.
Wilsons Chemicals bonds have a nominal yield of 6.6%. They closed the previous day at 91 7/8. An owner of 10 bonds will receive a yearly interest payment of: A. $66 B. $660 C. $91.88 D. $918.75
B. $660 A nominal yield of 6.6% for a corporate bond with a $1,000 par value equals $66 in interest payments. If an investor owns 10 bonds, he will receive an annual interest payment of $660.
An investor is seeking a balance between income and capital growth. Which of the following investment strategies MOST closely achieves this goal? A. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund B. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund C. 50% in an ETF that follows the S&P 500 and 50% in an equity foreign index fund D. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund
B. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund An investor who is seeking income and capital growth wants her assets to be diversified (approximately) evenly between equity and fixed-income investments. The best answer is 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund. Notice that this answer is a 60/40 split between equities and debt. The other answer choices are either too heavily concentrated in debt to provide growth, or too heavily concentrated in equities to provide income. (31665)
Four municipal bonds have the same maturity date. Which of the following bonds will cost an investor the greatest dollar amount when purchased? A. A 4 3/4% coupon bond offered on a 5.10 basis B. A 5 1/4% coupon bond offered on a 5.00 basis C. A 5 3/4% coupon bond offered on a 6.00 basis D. A 6 1/4% coupon bond offered on a 6.50 basis
B. A 5 1/4% coupon bond offered on a 5.00 basis When bonds are purchased at a discount (below the $1,000 par value) the yield to maturity (basis) will be greater than the coupon rate (nominal yield). This is the case in all of the choices listed except where the coupon rate of 5 1/4% is greater than the yield to maturity of 5%. This would mean that an investor purchased the bond at a premium (above the $1,000 par value) and paid the greatest dollar amount.
A municipal offering in which two or more issues of bonds have the same priority of claim against pledged revenues is referred to as: A. A double-barreled bond B. A parity bond C. A taxable bond D. An alternative minimum tax bond
B. A parity bond A parity bond is defined as a revenue bond in which two or more issues have the same claim to the pledged revenues. A double-barreled bond is one that is backed by a source of revenue as well as the full faith and credit of an issuer that has taxing power [i.e., a general obligation (GO) bond issuer].
If a person adds cash, accounts receivable, and marketable securities and then divides by current liabilities, the result is: A. Current ratio B. Cash assets ratio c D. Working capital
B. A spinoff Although the current asset section of a balance sheet may include additional items, when the total amount of cash, accounts receivable, and marketable securities are added together and divided by current liabilities, the result is the quick asset ratio (also referred to as the acid test ratio). The general formula for calculating the quick asset ratio is Current Assets minus Inventory divided by Current Liabilities.
The separation of a division or subsidiary from its parent to create a new corporate entity is considered A. A merger B. A spinoff C. An acquisition D. A violation of SEC rules
B. A spinoff The separation of a division or subsidiary from its parent to create a new corporate entity is considered a spinoff. On the other hand, a merger or acquisition is the combination of two entities.
The growth in the value of a variable annuity is: A. Taxable to the investor in the year it's declared B. Allowed to accumulate on a tax-deferred basis C. Used to reduce the cost basis of the investment D. Tax-deferred only if the investor has retired
B. Allowed to accumulate on a tax-deferred basis The growth in a variable annuity is automatically reinvested and grows tax-deferred. Any tax implications apply when distributions begin.
Roundville Bank is considering an investment in Roundville County bonds. The bonds contain a provision that permits banks to deduct 80% of the interest cost being paid to depositors on the funds used to purchase the bonds. These securities are known as: A. Alternative minimum tax bonds B. Bank-qualified bonds C. Private activity bonds D. Moral obligation bonds
B. Bank-qualified bonds Bank-qualified municipal bonds allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This is done to encourage banks to invest in municipal securities. To qualify, a municipality may only issue up to $10,000,000 annually.
Class A shares of an open-end investment company are different from Class B shares in that: A. Class A shares are common shares, while Class B shares are preferred shares B. Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge C. Class A shares pay quarterly dividends, while Class B shares pay a monthly dividend D. Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers
B. Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge The difference between Class A and Class B shares is normally the fact that A shares have a front-end sales charge while the B shares have a contingent deferred sales charge (CDSC). A CDSC is deducted only when the investor redeems shares. Generally, if the investor holds the B shares for a sufficient period, there is no sales charge deducted upon redemption.
An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT: A. Runway maintenance expenses B. Debt service expenses C. Hangar expenses D. Salaries of airport personnel
B. Debt service expenses Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.
Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security? A. Each year the customer will pay both federal and state income tax B. Each year the customer will pay only federal income tax C. Each year the customer will not pay any tax D. The customer will only pay tax at maturity
B. Each year the customer will pay only federal income tax The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amounted accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on U.S. government securities is subject to federal income tax, but exempt from state and local income taxes.
All of the following are typical characteristics of a 401(k) plan, EXCEPT: A. Employee contributions are fully and immediately vested B. Employers must match employee contributions C. An employee's taxable income is reduced by employee contributions D. Employee contributions grow on a tax-deferred basis
B. Employers must match employee contributions In a 401(k) plan, an employee can usually make a pre-tax contribution into the plan and reduce taxable income. Employee contributions and growth in the account are tax-deferred. Employers are not required to match contributions but may do so.
A bond with an 11% coupon is purchased at 103. The maturity of the bond is 20 years. The bond is callable in 10 years at par. The yield will be: A. Higher if called B. Higher if held to maturity C. The same if called or if held to maturity D. Determined by the issuer
B. Higher if held to maturity If the bond is held to maturity, the investor will be able to amortize the premium over a longer period, thereby realizing a higher yield. If the bond is called in ten years, the premium is amortized over half the time, resulting in a lower yield. A bond purchased at a premium and callable at par will always have a lower yield to call than to maturity. The opposite is true for a bond purchased as a discount callable at par. The yield to maturity will be lower than the yield to call.
Structured products may: I. Offer returns linked to equity securities II. Not offer returns linked to commodities III. Not offer returns linked to interest rates IV. Be formulated to provide principal protection A. I and III B. I and IV C. II and III D. II and IV
B. I and IV Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.
A purchaser representative must be: A. An employee of the issuer B. Knowledgeable and experienced in financial and business matters C. A registered representative D. A registered investment adviser (RIA
B. Knowledgeable and experienced in financial and business matters A purchaser representative must be knowledgeable and experienced in business and financial matters. His function is to assist a nonaccredited investor in evaluating the risks of the product. A purchaser representative may not be an affiliate or an employee of the issuer unless he is related to the client.
A project financed through revenue bonds is experiencing difficulty in that revenues are not sufficient to meet debt service payments. If, through legislative approval, the state pays interest and principal in a timely manner, the issue is MOST LIKELY: A. Double-barreled bonds B. Moral obligation bonds C. Bond anticipation notes D. Limited tax bonds
B. Moral obligation bonds Moral obligation bonds are municipal revenue bonds that are payable by the state if revenues from the project do not satisfy debt service payments. However, in order for the state to service the debt, approval of the state legislature is required. Double-barreled bonds are issued as revenue bonds that are additionally backed by the general obligation of the full faith and credit of the issuing municipality.
An individual convicted of insider trading 4 years ago has served time in federal prison. She arrives at your office looking for a position as an investment banker. You would inform her that: A. She could be hired but would not be permitted to talk to the clients B. She may not be hired as an investment banker for 6 years C. She may provide advice only on private placements since these are exempt securities D. Her banking deals must be preapproved in writing by a principal
B. She may not be hired as an investment banker for 6 years A convicted felon is barred from the securities business for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. A disqualified person may apply to an SRO to enter or reenter the securities industry before the 10-year period has elapsed. If the SRO grants the waiver, it must notify the SEC, which can overturn the waiver if it chooses.
If a technical analyst looked at a chart of a stock to identify the support level, he would look for the point at which the stock: A. Stopped increasing B. Stopped decreasing C. Remained relatively stable D. Reached a new high
B. Stopped decreasing A support level is found at the bottom of a trading range, where buyers came into the market to buy the stock and thereby support its price. It is at this point that the stock stopped decreasing.
All of the following statements are TRUE of general obligation (GO) bonds, EXCEPT: A. Interest is exempt from federal income tax, but may be subject to state and local tax. B. The assets of the issuing municipality are used to secure the bonds. C. The bonds are backed by the taxing authority and full faith and credit of the issuing municipality. D. Generally, GO bonds are less risky than revenue bonds.
B. The assets of the issuing municipality are used to secure the bonds. Interest from a general obligation bond (a type of municipal bond) is exempt from federal income tax. However, it is generally exempt from state and local taxes only if purchased by a resident of the state of issuance. In addition, a general obligation bond is backed by the taxing authority and full faith and credit of the issuer. Unlike a revenue bond, which is backed by a revenue generating project or facility. In general, GO bonds are less risky than revenue bonds due to the issuer's pledge of taxes and its full faith and credit.
A customer's initial transaction in a margin account is the purchase of 100 shares of XYZ at $15 per share. What amount must be deposited by the customer in this new account? A. $375 B. $750 C. $1,500 D. $2,000
C. $1,500 The key to this question is recognizing that this represents the customer's initial purchase of securities in the new margin account. The minimum initial equity requirement is 100% of the purchase or $2,000, whichever is less. Since the transaction represents a $1,500 purchase (which is less than $2,000), the customer must deposit the full $1,500. A broker-dealer will not provide a loan in a new margin account unless the customer has equity of at least $2,000.
A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is: A. $5,000 B. $10,000 C. $15,000 D. $20,000
C. $15,000The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is $15,000.
Mr. Jones buys an XRX October 50 put when the market price of XRX is also $50 per share, and pays a premium of $5. If XRX declines sharply and Mr. Jones exercises the put, what is the maximum profit Mr. Jones can have? A. $50 B. $500 C. $4,500 D. $5,000
C. $4,500 If the stock became worthless, Mr. Jones could then buy 100 shares and put it (sell it) to the writer for the $50 per share strike price, which equals $5,000 ($50 x 100 shares = $5,000). Mr. Jones would then make a profit of $5,000 minus the $500 premium paid for the put, which would be $4,500. The $4,500 is the maximum profit Mr. Jones could have since the stock could go no lower than zero.
An investor is long 200 shares of ABC stock at $58 and short 1 ABC May 60 call at 2. What is his breakeven point? A. $60 B. $62 C. $57 D. $56
C. $57 Since this is a position that involves a stock position PLUS an option position, using the phrase "call up and put down" will not work to calculate breakeven. For positions like this, the first step in determining the breakeven point is to calculate the investor's net investment amount. In this question, the investor paid out a total of $11,600 (200 shares x $58 per share), but received $200 in premium on the sale of the call. Therefore, the investor's net investment amount is $11,400. The second step is to recognize that since the investor has a 200 share position, the $11,400 must be divided by 200 to determine the breakeven point of $57. Theoretically, if ABC stock is trading at $57, the investor would lose 1-point per share for each 100 share position ($200 total loss); however, since the call option is out-of-the-money and expires worthless, the investor would keep the $200 premium. The $200 loss in the stock is offset by the $200 received in option premium and the investor will break even.
Which of following investments would be the BEST recommendation for a customer with a medium or moderate risk tolerance? A. 10% large-cap equity funds, 5% international equity mutual funds, 55% bond funds, and 30% cash B. 15% large-cap equity funds, 5% small-cap equity funds, 10% international equity funds, 45% bond funds, and 25% cash C. 35% large-cap equity funds, 15% small-cap equity funds, 15% international equity funds, 30% bond funds, and 5% cash D. 45% large-cap equity funds, 25% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash
C. 35% large-cap equity funds, 15% small-cap equity funds, 15% international equity funds, 30% bond funds, and 5% cash Moderate or medium risk tolerance is best defined as; willing to accept some risk to initial principal and some volatility in exchange for higher returns. The portfolio choice of 35% large-cap equity funds, 15% small-cap equity funds, 15% international equity funds, 30% bond funds, and 5% cash is the most appropriate with an allocation of 65% equity and 35% bonds and cash. The portfolio with 45% large-cap equity funds, 25% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash is too aggressive with 90% equity exposure. The remaining two choices are too conservative—not enough equity exposure.
Joanne is a 50-year-old woman who just left the job she had held for 20 years. She has a substantial amount accumulated in her 401(k), which she's rolling over into an IRA. If she's planning to use this money to retire in 12 to 15 years, which of the following investments is the most appropriate for her? A. A bonus variable annuity B. A fixed annuity C. A stock fund D. A municipal bond fund
C. A stock fund Joanne's time horizon is long enough to make a stock fund an appropriate choice for her IRA. Since Joanne is already receiving the benefits of tax-deferred growth, a variable annuity is not an appropriate option. Generally, buying a variable annuity for a tax-deferred retirement account is often an expensive way of needlessly duplicating the tax benefits that most of these accounts already provide. Municipal bond funds are appropriate for investors who are seeking tax-exempt income.
A registered representative has sent a preliminary prospectus to various clients who have indicated an interest in a new issue his firm is underwriting. The registered representative is notified that he has been allocated 500 shares of the new issue. The registered representative should: A. Allocate the 500 shares to his most active client B. Allocate 100 shares each to his best clients C. Contact all clients who have received a prospectus asking them if they have made a decision to purchase the new issue that is now available D. Keep the 500 shares for himself
C. Contact all clients who have received a prospectus asking them if they have made a decision to purchase the new issue that is now available The most appropriate action for the registered representative to take is to contact all clients who have received a prospectus and ask them if they have made a decision to purchase the new issue that is now available.
Which of the following choices would be the MOST advantageous tax benefit that an investor will receive from an oil and gas direct participation income program? A. Liquidity B. Depreciation of equipment C. Depletion D. Depreciation of land
C. Depletion The most advantageous tax benefit that an investor will receive from an oil and gas program is the depletion deduction. These deductions normally last for as long as the program produces oil and gas. Depreciation of equipment lasts a limited number of years and land may not be depreciated.
The Investment Company Act of 1940 regulates: A. Hedge funds B. REITs C. ETFs D. The level of commissions paid on mutual fund trades
C. ETFs ETFs (exchange-traded funds) must register with the SEC as either an open-end investment company or a unit investment trust. Hedge funds are private investment pools that are not regulated as investment companies. Real estate investment trusts (REITs) are not a type of investment company. The commissions or sales charges on mutual funds is established by FINRA.
A municipal bond backed by the full faith and credit of a state or city is called a(n): A. Debenture bond B. Revenue bond C. General obligation bond D. Income bond
C. General obligation bond A general obligation bond is a municipal bond backed by the full faith and credit of a state or city. This means the municipality has promised to use its taxing power to raise revenue to pay principal and interest on the bonds.
An investment that outperforms the market as it goes up but underperforms the market as it goes down would have a beta: A. Equal to 1 B. Less than 1 C. Greater than 1 D. That is negative
C. Greater than 1 Beta is a measure of a stock's or portfolio's volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If an investment has a beta of greater than 1, it will outperform the market as it goes up and underperform the market as it goes down. Negative betas are associated with stocks or portfolios that move in an opposite direction of the market.
A company that manufactures solar panels has approached an investment banker to help the firm raise capital for its new manufacturing plant in Colorado. The firm wants to raise capital in a private placement, and the CFO of the company wants to know the difference between convertible debt and debt with warrants attached. Which TWO of the following statements are TRUE? I. Both convertible debt and debt issued with warrants attached will trade as one unit each II. Convertible debt trades as one unit, but debt issued with warrants attached trades as two separate units III. Both convertible debt and debt issued with warrants attached have a potential dilutive effect on the common stockholders IV. Convertible debt has a dilutive effect on common shares, but debt issued with warrants does not A. I and III B. I and IV C. II and III D. II and IV
C. II and III A convertible bond is a hybrid security consisting of a bond with an imbedded call option permitting the purchase of a share of common stock at a fixed price. A convertible bond trades as one unit. A bond issued with warrants attached will trade as two separate units. When the bond is issued, the warrants are detached from the bond and will trade as a separate unit. An event that will reduce the proportionate claim of common stockholders to the earnings of a corporation is considered to be dilutive. The conversion of convertible securities into common stock and the issuance of additional shares of common stock (e.g., based on the exercise of warrants) will each result in additional shares owned by new shareholders.
Which TWO of the following statements are TRUE about the market price of an option? The more volatile the underlying stock, the smaller the premium The current market price of the stock compared to the strike price influences the size of the option's premium The longer the period of time remaining until the option expires, the greater the premium Out-of-the money options have no time value A. I and II B. I and III C. II and III D. II and IV
C. II and III An option's premium is determined by the volatility of the underlying stock, the current market price of the underlying stock, and the time remaining until the option expires. The market price of the stock compared to the strike price determines whether the option is in- or out-of-the-money and the intrinsic value. An out-of-the-money option has no intrinsic value, its premium is all time value. The more volatile the underlying stock, the larger the premium. The longer the time remaining until the option expires, the greater the premium.
ABC Corporation has issued a new cumulative, convertible preferred stock. The provisions of the new issue provide for which TWO of the following choices? I. Dividends would be paid on the preferred stock after any dividends are allowed to be paid on the common stock II. Omitted dividends will accumulate and must be paid before any dividends are allowed to be paid on the common stock III. The stock may be converted into common stock at any time by the preferred stockholder IV. ABC Corporation may call the stock at its par value before the call protection period has expired A. I and III B. I and IV C. II and III D. II and IV
C. II and III Dividends on preferred stock are paid before, not after, dividends are paid on common stock. Cumulative refers to omitted dividends that will accumulate and must be paid prior to any common stock dividends being paid and these securities may be converted into common stock at any time. Preferred stock that is convertible usually has a call feature, but the preferred stock may not be called until the call protection has expired.
List from last to first the order of payments if a limited partnership declares bankruptcy. Secured creditors General partners Limited partners General creditors A. I, II, III, IV B. IV, III, II, I C. II, III, IV, I D. I, IV, III, II
C. II, III, IV, I If a limited partnership declares bankruptcy, state law provides a priority for settling accounts. The order for settling accounts is secured creditors, general or unsecured creditors, limited partners, and last, general partners. Remember that this question is asking for the order from last to first.
A portfolio composed of five different state G.O. issues will NOT provide an investor with protection from: A. Economic downturns in specific geographical locations B. Legislative changes in different states C. Interest-rate fluctuations D. Adverse decisions by state courts
C. Interest-rate fluctuations A diversified portfolio will provide protection from a variety of risks, but cannot protect against fluctuating interest rates. All bonds, regardless of the issuer's location, are subject to interest-rate risk.
An advantage a corporation receives when it issues a convertible bond is that: A. It's able to offer bonds with a higher rate of interest to investors B. It's able to offer bonds with a longer maturity to investors C. It's able to borrow money at a lower rate of interest D. It's able reduce the number of shares that it has outstanding
C. It's able to borrow money at a lower rate of interest Convertible bonds allow corporations to borrow money at a lower rate of interest (lower coupon) since the convertible feature is an attraction for investors. Investors are willing to accept the lower interest rate in exchange for the opportunity to convert the bonds into common stock. In addition, the investor has some downside protection because, even if the price of the stock falls, the convertible bond still has inherent value as a bond.
An official statement for a general obligation bond says that property taxes may not be raised above a certain level. This is known as a: A. Level debt service bond B. Double-barreled bond C. Limited tax bond D. Moral obligation bond
C. Limited tax bond A GO bond is backed by taxes. The issuer promises to raise taxes, if necessary, to pay principal and interest on the bonds. A limited-tax GO bond has a ceiling on how high the tax rate may be raised.
An investor is approaching the age she would decide to annuitize a contract. She is considering different settlement options and wants you to explain the benefit of selecting a straight-life payout option. You would explain that this option is attractive because it: A. Is the most conservative method for receiving payments B. Allows for a beneficiary for the entire payout period C. Provides the maximum cash flow of all life payout options D. Provides an equal amount each month for the investor's lifetime
C. Provides the maximum cash flow of all life payout options The annuitant will receive the greatest cash flow from the straight-life annuity payout option. This option allows the annuitant to receive payments as long as the annuitant is alive. At death, the payments stop. Moreover, since no beneficiary is designated, the insurance company is relieved of its liability to pay the balance of the plan. The annuitant also has the greatest degree of risk with this type of payout option.
In a discussion with a client, a registered representative refers to a bond yield that has been reduced by the inflation rate. This yield is known as the: A. After-tax yield B. Discount rate C. Real interest rate D. LIBOR
C. Real interest rate The real interest rate is the yield of a security reduced by the inflation rate. While it represents earnings remaining once inflation is taken into account, the real interest rate does not factor in the tax consequences. The discount rate is the rate of interest that the Federal Reserve charges member banks for loans. LIBOR (the London Interbank Offered Rate) is the rate of interest that banks in London charge each other for short-term loans
Taxable income normally includes: A. The interest on municipal bonds issued in the state in which the taxpayer lives B. The taxpayer's annual 401(k) contributions C. Reinvested dividends paid on a mutual fund investment D. Any unrealized capital appreciation on stocks that the taxpayer owns
C. Reinvested dividends paid on a mutual fund investment Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.
What type of risk do zero-coupon bonds eliminate? A. Credit risk B. Purchasing power risk C. Reinvestment risk D. Market risk
C. Reinvestment risk Zero-coupon bonds are issued at a discount and do not pay semiannual interest. Therefore, there are no interest payments to reinvest, eliminating reinvestment risk. When investing in fixed-income investments, one of the uncertainties is whether interest rates will allow an investor to realize the total return that was calculated at the time of the investment (yield to maturity). Zero-coupon bonds do not have reinvestment risk, but they do have extreme interest-rate risk because the bonds' duration will equal the years to maturity.
Which of the following investors is LEAST likely to purchase a collateralized debt obligation (CDO)? A. Agawam Commercial Bank & Trust Company B. Oakdale Pension Fund C. Robert & Susan Abramowitz, JTWROS D. Lincolnshire Hedge Fund
C. Robert & Susan Abramowitz, JTWROS Due to their highly complex nature, CDOs are generally not suitable for retail investors. A CDO (collateralized debt obligation) is a sophisticated financial instrument that begins with an individual loan (such as a mortgage or corporate debt). These loans are placed in a pool, and investors then purchase a security (bond, tranche, slice) that represents an interest in that pool. Each of these securities has a different maturity and credit risk, depending on the nature of the collateral behind it. This type of investment carries many risks and considerations that make it largely unsuitable for a typical retail investor
Which of the following choices will NOT affect the SMA in a long margin account? A. Cash dividends paid on securities in a margin account B. Cash deposited in the account to reduce the debit balance C. Stock dividends paid on securities held in the margin account D. Appreciation in market value of the securities in a margin account
C. Stock dividends paid on securities held in the margin account Stock dividends paid on securities held in a margin account will not increase the SMA. The market value of the stock already in the account will be reduced by the amount of the stock dividend as the number of shares of the stock increases. The total dollar value will remain the same. All the other choices will have an effect on the SMA.
When a beneficiary receives the death benefit from a variable annuity, the amount received is: A. Tax-free to the beneficiary B. Fully taxable to the beneficiary C. Taxable above the cost basis to the annuitant D. Taxable above the cost basis to the beneficiary
C. Taxable above the cost basis to the annuitant When a beneficiary receives the death benefit from a variable annuity, the amount above the cost basis is taxable as ordinary income to the beneficiary.
A customer wants to open a cash account. What information is NOT required on the new account form? A. The name of the registered representative responsible for the account B. Whether the customer is of legal age C. The customer's signature D. The branch manager's approval
C. The customer's signature The name of the registered representative and the signature (approval) of the branch office manager must always be included on a new account form. The customer's signature is required for a margin account but not for a cash account. The registered representative must determine whether the customer is of legal age.
Which of the following descriptions best defines a tax swap? A. The purchase and sale of bonds to incur commissions B. The exchange of convertible bonds for stock to avoid the receipt of taxable interest income C. The purchase and sale of bonds to realize a capital loss to offset against a capital gain for tax purposes D. Exercising the exchange privilege of a mutual fund
C. The purchase and sale of bonds to realize a capital loss to offset against a capital gain for tax purposes A tax swap is the sale and purchase of bonds (or other securities) to realize a capital loss that can be offset against a capital gain.
The penny stock rules apply under which of the following circumstances? A. The stock is listed on the NYSE. B. The selling broker-dealer is not a market maker in the stock. C. The transaction is recommended by the broker-dealer. D. The customer has previously bought penny stocks on five different occasions.
C. The transaction is recommended by the broker-dealer. According to SEC rules, penny stock is a stock that sells for less than $5.00 and is not listed on Nasdaq or the NYSE. Instead, these low-priced stocks are quoted on the OTC Bulletin Board or OTC Pink Marketplace. However, penny stock rules don't apply under the following conditions: The customer is defined as an existing customer (i.e., a person who has maintained an account with a broker-dealer for more than one year or has previously engaged in three or more transactions involving penny stocks) The transaction is non-recommended or unsolicited The transaction is executed by a broker-dealer that's not a market maker in the security
An investor has a need for high liquidity with low principal risk. Which of the following would you recommend as a suitable investment based on this investment criteria? A. Treasury bonds B. Municipal bonds C. Treasury bills D. Corporate bonds
C. Treasury bills Based upon the investor's investment criteria, Treasury bills would be most suitable. Since a Treasury bill is a short-term instrument (maturing in one year or less), it has a low principal risk. There is also a considerable secondary market for Treasury bills, making them highly liquid.
Which of the following actions is a firm permitted to perform when it publishes a research report? A. Send the report to the subject company for approval and editing. B. Send a suggested target price for the company's stock to the subject company. C. Verify factual information with the subject company. D. Own more than 1% of the subject company's stock without disclosure.
C. Verify factual information with the subject company. To avoid conflicts, there are significant restrictions on firms that publish research reports on companies. These restrictions include sending the report to the subject company for editing or approval, sending a suggested target price for the company's stock to the subject company, owning 1% of more of the outstanding shares, or making a market in the subject company's stock without disclosure. However, firms are permitted to verify factual information with subject companies. (17045)
The amount of margin that must be deposited by the purchaser of an option contract is: A. 10% B. 20% C. 50% D. 100% According to Federal Reserve Board Regulation T, options may not be bought on margin. Therefore, the buyer will need to deposit 100% of the purchase price, which is the premium.
D. 100% According to Federal Reserve Board Regulation T, options may not be bought on margin. Therefore, the buyer will need to deposit 100% of the purchase price, which is the premium.
A mutual fund has an NAV of $26.85 and a sales charge of 8%. In order to find the asked price, the investor should divide the $26.85 NAV by: A. The 8% sales charge B. The number of shares outstanding C. 100% plus the 8% sales charge D. 100% minus the 8% sales charge
D. 100% minus the 8% sales charge To find the asked price for mutual fund shares, divide the NAV by 100% minus the sales charge percentage. $26.85 divided by 92% equals $29.18. Those purchasing shares of this fund would pay $29.18 per share.
A customer is currently invested in the RLK Growth Fund and is now interested in a less aggressive balanced fund. What should the customer's registered representative do based on this request? A. Indicate to the customer that the change cannot be made. B. Convince the customer to stay in the growth fund. C. Simply find a balanced fund in another fund family. D. Determine whether there's a balanced fund in the RLK fund family.
D. Determine whether there's a balanced fund in the RLK fund family. A customer always has the ability to change to different funds. The registered representative should listen to the client and point out the benefits of different funds, but there's no reason to convince the client to stay with one fund. However, there's an advantage to keeping the investments within a family (complex) of funds because of the potential reduction in sales charges. On the other hand, if the customer moves to another fund family, he will be assessed the highest sales charge.
A customer owns stock of a corporation that has declared a $1 dividend to holders of record Monday, December 22. If the customer wants to sell the stock, but still be entitled to the dividend, he should sell the stock on: I. Wednesday, December 17, regular-way settlement II. Friday, December 19, regular-way settlement III. Monday, December 22, cash settlement IV. Tuesday, December 23, cash settlement A. I or III B. I or IV C. II or III D. II or IV
D. II or IV The customer should sell the stock on Friday, December 19 on a regular-way settlement basis or on Tuesday, December 23 on a cash settlement basis. Since the record date is Monday, December 22, the ex-dividend date is Friday, December 19 (i.e., one business day before the record date). This means that a person who sells the stock on the ex-dividend date will receive the dividend because, as of this date, the stock is selling without the dividend. Additionally, if the stock is sold on December 23 on a cash contract basis (which requires a same-day payment and same-day delivery), the seller will be entitled to receive the dividend. The reason that the buyer will not receive the dividend in this case is because the last day that a buyer can receive the dividend on a cash contract basis is on the record date of Monday, December 22.
Two sisters want to open a joint account which allows the surviving sister to receive the entire account in the event of one sister's death. Which type of account should be suggested? A. Trust account B. Joint tenants in common C. Transfer on death D. Joint tenants with right of survivorship
D. Joint tenants with right of survivorship If a joint tenants with right of survivorship account is used, all of the assets pass to the surviving owner (sister) upon the death of the other owner. In a joint account that is established as tenants in common, each owner has a percentage of ownership and, at the time of death, the decedent's interest passes to her estate. Transfer on death (TOD) is not a designation for a joint account; instead, it is the instruction to transfer ownership of an individual account to a designated beneficiary upon the death of the account holder. Although a TOD designation avoids probate, estate taxes may still be levied against the decedent's estate.
In a soft-dollar arrangement, which of the following is not acceptable? A. Providing in-house research B. Providing software for a data terminal C. Providing third-party research D. Providing office supplies
D. Providing office supplies For a soft-dollar arrangement to be acceptable, the benefit being received by an adviser must benefit its clients. Since the adviser's receipt of office supplies do not benefit its clients, it not an acceptable reason for directing business.
The major risk of investing in long-term, high-grade bonds is: A. Not being able to pay interest when due B. Not being able to pay principal upon maturity C. Limited marketability D. Purchasing-power risk
D. Purchasing-power risk Long-term, high-grade bonds are relatively safe investments since interest payments and repayment of principal are relatively secure. However, long-term bonds, even T-bonds, have a significant amount of purchasing-power risk. This is because the amount of interest is fixed. The purchasing-power of the interest income may decline over the long term because of inflation, which would reduce the amount that could be purchased with the fixed amount of dollars.
A client has annuitized a variable annuity which has an AIR of 4% but was sold to her by an RR who used an illustration containing a 7% growth rate. This past period, the separate account grew at a rate of 4%. The client's next payment will: A. Rise by the 3% AIR differential B. Rise by the lesser of the AIR or interest rate used in the illustration C. Rise by 7% since an illustration is a guaranteed return D. Remain the same
D. Remain the same When an investor annuitizes a variable annuity the investor exchanges accumulation units for a fixed number of annuity units. The number of annuity units and value of each unit is determined by 3 factors: 1) the value of the contract at annuitization; 2) the life expectancy of the investor in years multiplied by the frequency of payments (monthly, quarterly, annually, etc.); and 3) An assumed investment rate (AIR). This rate is only an assumption that the funds chosen in the separate account will continue to grow in the future as they have in the past. There is no guarantee that this will occur. After each payment, we compare actual performance to what was initially assumed. If the funds in the separate account grow faster than what was assumed, the liquidation value of the remaining units will be worth more and the payments will increase. Should the funds underperform what was assumed at annuitization, payments will decrease. If the funds perform exactly as assumed, the payment amounts will remain the same. An illustration is a marketing tool only. It is used by the rep during the initial sale to project hypothetical results. It has no bearing on the terms of the contract nor the actual results achieved. A hypothetical illustration is not part of the annuity contract and cannot be used to imply actual results.
Michelle Gladstone has noticed that many of her elderly clients do not bother to read the prospectus prior to making a purchase. They consider these documents much too confusing and far too time consuming to go through. They generally rely on Michelle's advice when pondering investment selections. Michelle is uncomfortable with her clients' lack of due diligence and is attempting to come up with a better way to educate them about the risks and rewards of investing in a particular fund. Under SEC rules, Michelle may engage in which of the following activities? A. She may type up a large font version of the prospectus for her clients' benefit, provided the large print version has been reviewed and approved by the firm's chief legal counsel. B. She may underline or highlight key content areas within the prospectus, but must remind her clients that the points she decided to emphasize are of no more or no less importance than the balance of the material contained in the full prospectus. C. She may summarize the prospectus provided her branch manager approves of the resulting abbreviated document and attaches a written notice to all recipients that a full version of the prospectus is available upon request. D. She may provide her clients with a summary prospectus obtained from the fund's wholesaler.
D. She may provide her clients with a summary prospectus obtained from the fund's wholesaler. Many mutual funds are employing shorter summary versions of the prospectus or profiles. These reader friendly documents highlight the most relevant information found in the complete prospectus and are designed to encourage potential investors, who may be intimidated by the complete prospectus, to do their due diligence prior to investing. An investor may buy shares solely based on the contents of this short version prospectus but must be made aware that they are entitled to receive a complete (full version) prospectus prior to making a purchase. Regardless of their intentions, RRs are not permitted to modify a traditional prospectus or make up their own summary piece. The only summary document that may be used (a profile) is created by the fund's distributor and filed with the SEC. Clients may make a purchase based on this profile and will receive a complete prospectus with their confirmation.
A 7% convertible bond has a conversion ratio of 40. The bond has a nondilutive feature and the common is selling at $43 a share. If the company distributes a 10% stock dividend, which of the following statements is TRUE regarding the convertible bond? A. The conversion ratio remains at 40, but the conversion price is reduced B. The conversion ratio increases to 45.50 and the conversion price remains constant C. The conversion price decreases to $22.73 and the conversion ratio remains the same D. The conversion price decreases to $22.73 and the conversion ratio increases to 44
D. The conversion price decreases to $22.73 and the conversion ratio increases to 44 A nondilutive feature requires that the conversion features be adjusted should there be a stock split or stock dividend. The conversion ratio will be increased and the conversion price will be reduced. The new conversion ratio will be 44 [the old ratio (40) plus the old ratio times the percentage dividend (40 x 10% = 4)]. The new conversion price will be the par value of the bond divided by the new conversion ratio ($1,000 divided by 44 equals $22.73).
A 4.65% New York City GO bond matures in 20 years. The bond is callable in 8 years at 103. Which of the following statements is TRUE? A. The investor has 3 years of call protection B. The issuer must pay investors an 8-point call premium to exercise the call privilege on the bonds C. The investor will receive less for the bond if it is called versus holding the bond to maturity D. The issuer may exercise the call provision anytime after the 8th year
D. The issuer may exercise the call provision anytime after the 8th year The call premium of 3 points ($30 per bond) refers to the amount above par value which the issuer must pay the owner of the bond when the bond is called. Issuers usually call outstanding bonds when interest rates decline, and they are able to issue new bonds at lower rates of interest. The bond has 8 years of call protection. The issuer would need to make an outlay of cash to call back the bonds, but would save money because of the lower rate of interest the issuer would pay on the new bonds. A call provision is exercised by an issuer and not the bondholder.
When comparing an Albany, New York hospital revenue bond to a Buffalo, New York hospital revenue bond, you notice that they have similar maturities but the Buffalo bond has a higher yield. A possible reason for this is: A. Income taxes in Buffalo are higher than in Albany B. The cost of living is greater in Buffalo than in Albany C. Per-capita debt is higher in Buffalo than in Albany D. There are more hospitals located in Buffalo than in Albany
D. There are more hospitals located in Buffalo than in Albany Competing hospitals could affect the project's revenue and, therefore, could reduce the bond's security. Each of the other choices relates to taxes, which do not secure revenue bonds.
Which of the following statements is TRUE concerning the use of bond volatility ratings when marketing a mutual fund? A. This practice is inherently deceptive and expressly prohibited under SEC regulations. B. These ratings must comply with the uniform standard set by Standard & Poor's and Moody's rating agencies. C. These ratings are often called risk ratings and are used for high yield funds exclusively. D. These ratings may account for NAV changes due to currency fluctuations.
D. These ratings may account for NAV changes due to currency fluctuations. Bond volatility ratings are independently produced ratings that attempt to quantify how sensitive a given bond fund's NAV is to changes in the economy such as interest rate and/or currency fluctuations. There is no standardized scale for this measurement and these ratings may never be referred to as risk ratings.
When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are: A. Revenue bonds B. General obligation bonds C. Federal agency bonds D. Treasury bonds
D. Treasury bonds Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded.
A municipal dealer may guarantee a customer against loss: A. If the dealer has discretion over the account B. If the account is a cash account C. If the account is a margin account D. Under no circumstances
D. Under no circumstances A municipal dealer may not guarantee a customer against loss under any circumstances.
A corporation is voting on several new directors. A customer who cannot attend the meeting to vote in person: A. Will receive a proxy to vote, if requested B. Can verbally assign the right to vote to another individual C. Can only vote in person D. Will receive a proxy to vote, or sign over the vote to another person
D. Will receive a proxy to vote, or sign over the vote to another person A corporation must notify its shareholders of upcoming elections by distributing proxies. If shareholders cannot vote in person, they can vote by proxy or they can sign the vote over to another person.
To determine how much of a mutual fund's distributions are required to be included in taxable income, the shareholder should examine: A. Form 4789 B. Form 1099 C. Form 1040 D. The Statement of Additional Information
Shortly after the end of each calendar year, mutual fund investors will receive a copy of IRS Form 1099-DIV for each fund they own. The form will describe how fund distributions are to be treated for tax purposes.
A customer has a short margin account with a broker-dealer. This account must be marked to the market: A. Twice a day B. Once a day C. Once every five business days D. Once a month
The term marked to the market refers to the adjustment made in a customer's account due to a change in the market value of the securities. A margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. Any change may result in the customer being required to deposit additional funds in the account.
