Test 4
Which of the following statements is TRUE concerning exchange-traded funds (ETFs)? A The securities may be used by individuals to pursue a market timing strategy B The purchase price is based on a net asset value, plus any applicable sales charges C The securities are priced once a day based on the close of trading D Transactions in these securities must be executed in a cash account
A The securities may be used by individuals to pursue a market timing strategy
Which of the following statements is TRUE regarding trustee-to-trustee IRA transfers? A There is no limit to the number of transfers per year. B Transfers must be completed within 60 days. C Transfers are the same as IRA rollovers. D There may be a penalty tax on the transfer.
A There is no limit to the number of transfers per year. A transfer of funds from one IRA trustee to another is not considered to be a distribution or a rollover. There is neither a limit to the number of transfers, nor are there any taxes or penalties. This differs from a distribution from a retirement plan. The distribution must be rolled over into another qualified plan, within 60 days of receiving the money, in order to avoid taxes and penalties. Rollovers may only be done once each year.
Each calendar year, a member firm must provide customers with which of the following in writing? A A commission schedule B FINRA's website address C The SEC's website address D A copy of the firm's arbitration policy
B FINRA's website address Each calendar year, a member firm must provide customers with written notification of the FINRA website address, the BrokerCheck® hotline number, and a statement regarding the availability of an investor brochure that describes FINRA's BrokerCheck®.
Which of the following is TRUE for the buyers of put options? A They have the right to buy 100 shares of stock. B They have the right to sell 100 shares of stock. C They have the obligation to buy 100 shares of stock. D They have the obligation to sell 100 shares of stock.
B They have the right to sell 100 shares of stock.
A stock that generally trades at a price that's lower than its fundamentals would indicate is referred to as a: A Cyclical stock B Defensive stock C Growth stock D Value stock
D Value stock
Which of the following political contributions made by a municipal finance professional (MFP) will NOT violate the provisions of the MSRB Rule G-37? A $100 to a candidate for whom the MFP may vote B $100 to a candidate for whom the MFP may not vote C $500 to a candidate for whom the MFP may vote D$500 to a candidate for whom the MFP may not vote
A $100 to a candidate for whom the MFP may vote Municipal finance professionals (MFPs) are allowed to make political contributions of up to $250 per person to candidates for whom they are permitted to vote. Any contribution made to a candidate for whom they are not entitled to vote would be a violation. For example, if you are an MFP and a resident of New Jersey, you may not contribute to an election campaign for the governor of New York.
An investor bought 5 ATT June 30 puts. These options will have intrinsic value when the market price of ATT is: A $25 B $30 C $35 D $40
A $25 A put will have intrinsic value (also known as being in-the-money) when the market price of the underlying security is less than the strike price. Of the choices given, the only one which is lower than the exercise price is $25.
If ABC Brokerage (a broker-dealer) purchases 600 shares of stock from a customer and places the securities into its inventory, it likely acted as a(n): A Dealer B Designated market maker C Agent D Underwriter
A Dealer When a broker-dealer buys a security from a customer using its own funds and places the securities into its inventory, it is acting as a dealer (principal). Since the firm is buying the securities from the customer, the customer is charged a markdown on the transaction (the firm charges a markup if it is selling the securities to the customer). On the other hand, if the firm locates the other side of the trade for its customer, it is acting as a broker (agent) and will charge the customer a commission. A firm is acting as an underwriter when it buys securities from an issuer and sells them to customers (i.e., it engages in primary market transactions). A firm that controls trading in a given stock on an exchange is referred to as a designated market maker (DMM).
Regarding cash and margin accounts, which of the following statements is NOT TRUE? A In a cash account, a customer is only required to deposit 50% of a purchase B In a margin account, a customer is only required to deposit 50% of a purchase C Under Regulation T, a customer must fully pay for her purchase in a cash account by no later than the fourth business day following the trade date D Under Regulation T, a customer must pay for her portion of a purchase in a margin account by no later than the fourth business day following the trade date
A In a cash account, a customer is only required to deposit 50% of a purchase The provisions of Regulation T apply to both cash and margin accounts. In both accounts the required customer deposit must be made by the fourth business day after the trade date. However, the required customer deposit amount is different based on whether the purchase is made in a cash or margin account. For any purchases that are made in a cash account, a customer must make full payment (no credit is extended by the B/D); on the other hand, for any purchases that are made in a margin account, a customer is only required to pay 50% (50% credit is extended by the B/D).
Which of the following is an advantage of a unit investment trust as compared to a managed mutual fund? A It usually has lower operating costs. B Its securities are redeemable. C The manager can adjust the portfolio when market conditions change. D It is not registered with the SEC.
A It usually has lower operating costs. Since unit investment trusts (UITs) have fixed portfolios with no manager, they have no management fee. Therefore, UITs have lower operating costs than most mutual funds. Both UITs and mutual funds issue redeemable securities and are registered with the SEC under the Securities Act of 1933 and the Investment Company Act of 1940.
Which of the following is NOT a type of systematic risk? A Liquidity risk B Market risk C Interest-rate risk D Inflation risk
A Liquidity risk Liquidity risk is an example of unsystematic or diversifiable risk, which is applicable to a specific security. On the other hand, systematic risk is one that affects all asset classes in the same manner. Examples of systematic risk include market risk, interest-rate risk, and inflation risk. If there is an overall decline in the stock market, it will cause stock prices to go down (market risk). If market interest rates rise, it will cause bond prices to decline (interest-rate risk). And finally, an increase in the rate of inflation will generally cause the overall bond market to decline.
A registered representative has found an investment that her firm does not offer, but that she believes is suitable for many of her clients. She makes an arrangement with another firm which allows her to refer clients to the firm and receive fees in return for their investment. If this is not disclosed to her firm, the activity is referred to as: A Selling away B Churning C Front-running D Breakpoint sales
A Selling away This prohibited practice is referred to as selling away. Selling away involves a registered representative engaging in private securities transactions by selling securities outside of the regular scope of her employment and without her firm's approval. In this situation, the representative is required to provide written notification to her firm prior to any transaction and, since she will be compensated, her firm is required to approve the transactions and maintain the records related to the transactions. Churning is defined as excessively executing transactions in a client's account for the sole purpose of generating commissions without regard to suitability. Front-running involves placing a personal order in front of a larger client's order to take advantage of the ultimate impact that the client's order may have on the security's value. Breakpoint sales involve offering mutual fund shares just below the dollar level at which a customer could receive a sales charge discount.
Which of the following organizations provides clearing services for equity securities? A The National Securities Clearing Corporation (NSCC) B The Fixed Income Clearing Corporation (FICC) C The Options Clearing Corporation (OCC) D A transfer agent
A The National Securities Clearing Corporation (NSCC) The National Securities Clearing Corporation (NSCC) provides clearing services for the majority of broker-to-broker equity trades in the United States. The NSCC is also a subsidiary of the Depository Trust and Clearing Corporation (DTCC) that provides custodial services.
The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the: A Trustee B Board of directors C Investment adviser D Distributor
A Trustee While mutual funds are often structured as corporations with a board of directors, a UIT is a trust. A trustee is responsible for overseeing the operation of a UIT. Since a UIT is not actively managed, it has no investment adviser.
If a bond is quoted at 103 3/8, this is equal to a price of: A $1,033.80 B $1,033.75 C $103.38 D $103.37
B $1,033.75 A bond's price is typically stated as a percentage of its par value. For example, a bond that's quoted at 100 is selling at 100% of its par value, or $1,000 (100% of $1,000). However, bond prices may be stated as a percentage of par plus a fraction. To make pricing easier, convert the fraction to a decimal (divide the numerator by the denominator). For example, 1/2 becomes .50, and 5/8 becomes .625. Therefore, a bond quoted at 103 3/8 is converted to 103.375% of par value, or $1,033.75 ($1,000 x 103.375%).
A grant anticipation note is normally paid from: A Proceeds from the issuance of long-term bonds B Funds received from the federal government C Revenues received at a future date D Receipts of future property taxes
B Funds received from the federal government A grant anticipation note (GAN) is normally paid from funding provided by the federal government. A bond anticipation note (BAN) is paid from proceeds from the issuance of long-term bonds. A revenue anticipation note (RAN) is paid from revenues to be received at a future date. A tax anticipation note (TAN) is normally paid from future tax receipts, such as property (ad valorem) taxes.
Which of the following accounts allow for its owners to have different percent interests? A Joint tenants with rights of survivorship B Joint tenants in common C Spousal IRAs D Uniform Transfer to Minors
B Joint tenants in common Only joint tenants in common (JTIC) allow for owners to have different percent interests in the account. Owners in joint tenants with right of survivorship (JTWROS) have equal interests. Spousal IRAs and Uniform Transfers to Minors (UTMA) are indvidual accounts and only have one owner.
A brokerage firm is in the final stages of a negotiated underwriting for a corporation. The proceeds of the issue are going to be used to build a new manufacturing facility. The company has sent airline tickets valued at $435 per ticket so the underwriting manager and three associates can attend the final due diligence meeting. If the tickets are accepted, does it violate the gift limit rule? A Yes, because the value of the tickets exceed $100 per person. B No, because the tickets cover legitimate business expenses. C Yes, because associated persons are not allowed to attend due diligence meetings. D No, because the cost of the tickets will be recovered from bond sales.
B No, because the tickets cover legitimate business expenses. Gifts in excess of $100 per person, per year are a violation of the gift limit rule. However, legitimate business expenses (the tickets in this case) are permitted by the IRS and are excluded from the gift limit rule.
A brokerage firm is holding $600,000 of securities for a customer. The securities are registered in the name of the customer. If the firm is being liquidated by SIPC, the customer would: A Be insured for $500,000 of securities B Receive the entire $600,000 of securities C Be insured for $100,000 of securities D Lose the entire $600,000
B Receive the entire $600,000 of securities Securities registered in the names of customers are returned to the appropriate individuals in full.
Which of the following statements is TRUE concerning time of trade disclosures regarding municipal securities? A The disclosures are only required if the execution occurred in the primary market. B The disclosure is required for an unsolicited transaction. C The disclosure is not required if the transaction was recommended. D The disclosure would apply only for a trade executed in a principal transaction.
B The disclosure is required for an unsolicited transaction. In addition to the best execution rule for municipal securities, a municipal securities dealer is required to disclose to a client all material information that's either known or reasonably accessible to the market. These time of trade disclosures are required to be made at or prior to the time of the trade and can be made either verbally or in writing. The main purpose of this rule is to require dealers to disclose to clients all of the relevant information concerning the securities that they're considering purchasing or selling. Many municipal securities have unique features and characteristics that should be disclosed to a client.
Which of the following actions by the Federal Reserve Board results in a decrease in the money supply? A The purchase of securities in the open market B The sale of securities in the open market C A decrease in the discount rate D A decrease in the reserve requirements
B The sale of securities in the open market The sale of securities by the Federal Reserve Board in the open market results in the withdrawal of reserves from the banking system, thereby decreasing the money supply. All the other actions by the FRB result in an increase in the money supply.
Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? A They offer investors the same amount of liquidity as exchange-traded REITs B They are required to distribute the same percentage of taxable income as exchange-traded REITs C They are not required to make periodic disclosures that are required of exchange-traded REITs D They are suitable for the same investors as exchange-traded REITs
B They are required to distribute the same percentage of taxable income as exchange-traded REITs Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.
A business continuity plan (BCP) must designate no less than how many emergency contact persons? A One B Two C Three D The number of emergency contacts is determined by the size of the firm.
B Two The BCP must designate two emergency contact persons. Both of these individuals should be registered principals, but if one of these is not a registered principal, this person should be a member of the firm's senior management.
Which of the following statements is NOT TRUE regarding the Telephone Consumer Protection Act? A Broker-dealers must maintain a do-not-call list B Cold calls are allowed between 8:00 a.m. and 9:00 p.m. local time of the party being called C Broker-dealers are permitted to contact existing customers only during certain times during the day D The name of the caller must be given to the party called
C Broker-dealers are permitted to contact existing customers only during certain times during the day The Telephone Consumer Protection Act of 1991 sets forth standards that must be followed by those firms soliciting business over the telephone (i.e., cold calling). Telephone solicitations may be made only between 8:00 a.m. and 9:00 p.m. local time of the party being called. The person being called must be told the name of the caller and the firm on whose behalf the call is being made, and given a telephone number or address at which the firm may be reached. The firm must maintain a do-not-call list indicating the phone numbers of those individuals who have stated that they do not wish to be called in the future. Broker-dealers may contact existing customers anytime during the day
A contingent deferred sales charge (CDSC) is associated with which share class? A A no load B Class A shares C Class B shares D Class C shares
C Class B shares A contingent deferred sales charge is a declining sales charge and is associated with Class B shares. Many annuity contracts also have contingent deferred sales charges. CDSCs must be considered when a registered person recommends for a client to move assets from one fund/contract to another.
In a direct participation program, which party is the last to be paid in a liquidation? A Secured creditor B General creditor C General partner D Limited partner
C General partner For the dissolution of a direct participation program or limited partnership, the priority of claims on assets is secured creditors, then general creditors, then limited partners, and finally general partners.
When comparing long-term bonds and short-term bonds, all of the following statements are TRUE, EXCEPT: A Long-term bonds generally have higher yields B Fluctuations in the dollar price of long-term bonds are usually greater than for short-term bonds when the general level of interest rates change C Long-term bonds generally provide greater liquidity than short-term bonds D There is more purchasing power risk with long-term bonds when compared to short-term bonds
C Long-term bonds generally provide greater liquidity than short-term bonds When comparing long-term bonds and short-term bonds, all of the choices listed are true except long-term bonds generally provide greater liquidity than short-term bonds. Short-term bonds do not suffer from as large a price movement as long-term bonds when interest rates are changing. Long-term bonds are open to greater market risk, interest-rate risk, and purchasing-power risk. Both individual and institutional investors alike are more willing to accept a lower return (yield) in favor of more stable principal (less severe price swings).
Which of the following is used as the disclosure document for a private placement? A Red herring B Free writing prospectus (FWP) C Offering memorandum D Term sheet
C Offering memorandum
Which of the following statements is TRUE regarding dividends paid on stock? A The record date is set by the SRO B The declaration date will occur after the record date C The ex-dividend date is not set by the company's board of directors D All open orders are adjusted on the ex-dividend date
C The ex-dividend date is not set by the company's board of directors When a stock goes ex-dividend, its price is reduced by an amount sufficient to cover the dividend. Ex-dividend dates are set by the SROs, based on settlement rules for the stock. Only orders beneath the current market price are adjusted, not all open orders. The declaration, record, and payable dates are set by the company's board of directors. The declaration date occurs before all other events/dates.
A municipal finance professional (MFP) made a political contribution in excess of the allowable amount. Due to the contribution, his firm is subject to a ban on underwriting business with the issuer with which the candidate is affiliated for: A Six months, unless the MFP promises not to contribute again B One year C Two years D Five years
C Two years A two-year ban on negotiated underwriting business with the issuer is imposed if an MFP makes a political contribution in excess of the allowable amount.
XYZ Corporation has issued $50 million 7% bonds at a premium. The bonds have a current yield of 6% and a yield to maturity of 5%. An investor purchasing $1,000,000 face value of bonds at the offering will receive a yearly income of: A $35,000 B $50,000 C $60,000 D $70,000
D $70,000 An owner of the bonds will receive 7% of the par value yearly regardless of the cost. In this example, the investor purchased $1,000,000 face value of bonds and will, therefore, receive $70,000 (7% of $1,000,000 = $70,000) in yearly income.
According to FINRA, which of the following is NOT considered an institutional account? A An account for a bank B An account for a registered investment adviser C An account for a registered investment company D An account for a person with $2 million of assets
D An account for a person with $2 million of assets An institutional account includes those of banks, savings and loans, insurance companies, registered investment advisers, registered investment companies, or any person with total assets of at least $50 million.
A firm may place a temporary hold on funds that are being sent out of which of the following customers? A Any customer who is over the age of 60 B Any customer who is under the age of 18 C Any customer who is over the age of 18 and has no financial experience D Any customer who is over the age of 18 and has a mental or physical impairment
D Any customer who is over the age of 18 and has a mental or physical impairment A firm may place a temporary hold on the disbursements or transfers of funds and securities from any account related to a specified adult. The term specified adult is defined as any person who is age 65 or older as well as 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. This determination should be based on the facts and circumstances that are observed in the firm's business relationship with the person.
Relative to the 5% Markup Policy, which of the following statements is TRUE? A A broker-dealer must charge less than a 5% markup. B A broker-dealer may never charge more than a 5% markup. C It is an SEC rule. D It serves as a guideline when determining a broker dealer's percentage markup.
D It serves as a guideline when determining a broker dealer's percentage markup. FINRA members are not permitted to charge prices or commissions that are unfair or excessive. To assist members in determining the level of charges that are fair, FINRA has developed a markup policy, also known as the 5% Markup Policy. (Although stated in terms of markups, the policy applies to markups, markdowns, and commissions.) The rule applies to both exchange-listed and non-exchange-listed securities and applies whether the broker-dealer is acting in a principal or agency capacity. The 5% Markup Policy is a guideline, not a ceiling. According to industry rules, commissions and markups must be reasonable and justifiable.
A customer purchases 1,000 shares of stock at $55 in a cash account. On the payment date, the stock is selling at $65 per share but the customer has not paid for the transaction. Which of the following actions would be considered freeriding?' A Depositing $55,000 to pay for the purchase B Depositing $55,000 cash into the account and then liquidating the shares at $65 C Depositing $65,000 into the account and then liquidating the shares at $65 D Liquidating the stock at $65 and using the sale proceeds to pay for the original purchase
D Liquidating the stock at $65 and using the sale proceeds to pay for the original purchase The customer would not be permitted to liquidate the stock and use the sale proceeds to pay for the original transaction. This prohibited practice is known as freeriding. To satisfy the $55,000 requirement in the cash account, the customer may deposit the full amount in cash. There is no violation if the customer deposits more than the amount required
Which of the following statements is NOT TRUE about a customer free credit balance at a broker-dealer? A A customer free credit balance represents funds that a customer can withdraw on demand. B Notification of the free credit balance must be provided on each statement. C The notice must state if the funds are not segregated and may be used in the conduct of the broker-dealer's business. D Notification must be provided at least semi-annually.
D Notification must be provided at least semi-annually. All of the statements are true except that notification must be at least semi-annually. Actually, notification must be provided at least quarterly. If statements are sent more frequently (i.e., monthly), then notice must be provided on each statement.
The issuer does NOT have access to the beneficial owner's name and address for stock held in street name if the customer is a: A Trustee B Investment adviser C Nonobjecting beneficial owner D Objecting beneficial owner
D Objecting beneficial owner An objecting beneficial owner instructs the broker-dealer to keep his personal information confidential.
A customer sells 500 shares of stock to a broker-dealer that makes a market in the stock. The broker-dealer acted in a(n): A Agency capacity and charged the customer a commission B Principal capacity and charged the customer a commission C Agency capacity and charged the customer a markup D Principal capacity and charged the customer a markdown
D Principal capacity and charged the customer a markdown A broker-dealer that's always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge a customer a markdown when buying the stock from the customer and a markup when selling the stock to the customer. When acting in an agency capacity, the broker-dealer will not take the other side of the trade and normally charges the customer a commission.
Regarding ETFs, which of the following statements is TRUE? A ETFs are considered hedge funds by the SEC. B ETFs may only hold equity positions. C ETFs grow tax-deferred. D Typically, ETFs may be sold short.
D Typically, ETFs may be sold short. Exchange-traded funds (ETFs) are investments that resemble UITs. These products may be sold short, may be purchased on margin, and may invest in either equity or debt instruments. A fixed portfolio is typically constructed to either track a specific index (e.g., the Wilshire 5000) or a given market segment (e.g., airlines or medical companies).
