Test Questions

For nonlisted and non-Nasdaq securities, the prospectus for an APO must be provided to all those who purchase securities for how many days after the effective date?

40 (For nonlisted and non-Nasdaq securities, the prospectus delivery requirement period in the aftermarket following an APO is 40 days, 90 days for an IPO. 25 days for an IPO of a Nasdaq or exchange listed security, and zero days for an APO.)

Depository Trust Company (DTC)

A central securities certificate depository through which members effect security deliveries between each other via computerized bookkeeping entries, thereby reducing the physical movement of stock certificates

stock warrant

A certificate that grants the owner the option to buy a given number of shares of stock, usually within a set time period.

Gross Domestic Product (GDP)

A measurement of the total goods and services produced within a country.

Deflation occurs during A. a recession, coinciding with an economic contraction B. a depression, coinciding with an economic trough in the business cycle C. a depression, coinciding with economic expansion in the business cycle D. a recession, coinciding with economic peaks

A. (Deflationary periods in the economy are most associated with severe recessions. Recessions occur during periods of economic contraction in the business cycle.)

What is the tax status of a dividend paid to a U.S.-based ADR investor? A. These dividends may be taxed by both the foreign country and the US B. These dividends are tax free C. These dividends are tax-deferred D. These dividends are only taxable to foreign buyers

A. (Dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability. Note: Any trading profits (capital gains) from the ADR would only be taxable here in the United States.)

For restricted stock (unregistered) held by an affiliate (insider), which of the following applies? A. 6 month holding period, with volume limits thereafter B. 6 month holding period, with sales allowed freely thereafter C. No holding period, but volume limits always apply D. No holding period or any volume restrictions

A. (For restricted stock (unregistered) held by an affiliate (insider), there is a 6-month holding period, with volume limits applicable thereafter. The volume limits would remain in effect for as long as the individual is an affiliate.)

Put buyers are bearish. Puts have intrinsic value if the price of the underlying stock falls below the exercise price of the option, The client will be profitable if the price decline (below the strike) exceeds the amount of the premium paid. If the price of the stock rises above the exercise price or is the same as the exercise price, the put will expire worthless. A. at, or out of the money B. out of, or in the money C. only in the money D. at, or in the money

A. (If a contract has no (zero) intrinsic value, it can only be either at or out of the money. Anytime a contract has intrinsic value, it is in the money by that amount.)

Which of the following would NOT be considered violations? I. As soon as a customer opens a margin account and signs the loan consent agreement, the BD lends all of the securities in the customer's account to other customers for the purpose of selling short. II. A BD temporarily lends a customer's securities to another customer with no loan consent on file. III. A registered representative transfers funds from Mr. Smith's account to the account of his spouse, Mrs. Smith, in order to meet a margin call she has received. The intent is to move the funds back to Mr. Smith once Mrs. Smith makes her required margin call deposit. IV. Mr. Smith makes a deposit into his spouse's account for the purpose of meeting a margin call. A. I and IV B. I and III C. II and IV D. II and III

A. (Lending a customer's securities with no loan consent on file is a violation. A loan consent, generally part of the margin agreement, must be signed for securities to be loaned to another customer. Generally, the loan is to accommodate the short sale of the securities. Once a loan consent is signed, any or all of the accounts securities can be loaned to others. Additionally, moving or transferring funds or utilizing funds or securities in any way not expressly intended by the customer is a violation. Anyone, however, can make a deposit into their own or another person's account, but once deposited it becomes the property of the account owner.)

A put will have intrinsic value if, just before expiration, the price of the underlying stock is A. less than the exercise price B. anywhere near the exercise price, above or below C. greater than the exercise price D. equal to the exercise price

A. (Put buyers are bearish. Puts have intrinsic value if the price of the underlying stock falls below the exercise price of the option, The client will be profitable if the price decline (below the strike) exceeds the amount of the premium paid. If the price of the stock rises above the exercise price or is the same as the exercise price, the put will expire worthless.)

A customer wants to save some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is TRUE? A. The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over. B. The customer may make annual contributions until the grandson graduates from college. C. The customer may take a deduction for the amount contributed D. The maximum contribution is $3,000 annually

A. (The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.)

An investor owns 200 shares of MNO common stock. The company's management has proposed a 2 for 1 stock split. If the price of the stock at the time of the split is $50, what would the investor's adjusted position be? A. 400 shares at $25 B. 100 shares at $25 C. 100 shares at $200 D. 400 shares at $100

A. (The number of shares doubles to 400 (2 × 200) and the price per share would be $25 ($50 / 2).)

Opening a margin account for a client requires the client to do all of the following EXCEPT A. Signing the loan consent B. signing the hypothecation agreement C. providing customers with a risk disclosure document D. signing the credit agreement

A. (The signing of the loan consent agreement allowing one's securities to be loaned to others for the purpose of short sales is optional; all the other items are required to be signed to open a margin account.)

An order is entered by a customer to sell at 30 stop limit. Once the order is entered, the stock trades in the following sequence: 32, 29, 31, and 33. The order would be executed and the investor would receive a price of A. 31 B. 29 C. 32 D. 30

A. (This is a sell stop order with a limit of 30. Once the stock trades at 30 or lower, the order is elected (triggered) and becomes a live working order. This occurs at 29. The order will then be executed at its limit (30) or better. This occurs at 31.)

An investor purchases a bond offered at par. The bond has a coupon rate A. equal to its current yield B. less than its current yield C. greater than its yield to maturity D. less than its yield to maturity

A. (When a bond is selling at par, its coupon or nominal rate, current yield, and yield to maturity are all the same.)

Which of the following would be considered excessive transactions? A. An RR buys and sells the same security for a customer 3 times during a single day B. A RR places a customer's securities into the firm's investment account C. A customer orders 100 shares. The RR places an order for him for 200 D. A customer orders 5,000 shares of an OTC stock. The RR orders 100 shares for himself before placing the customer's order

A. (Without further information, it would seem likely that trading the same security 3 times in one day would be viewed as excessive trading. Purchasing the incorrect amount, commingling and front-running are prohibited practices, but are not classified as churning (excessive transactions).)

Which of the following constitute a private securities transaction, or "selling away"? I. A registered representative executes a trade for a customer in securities of a type normally handled by the representative's broker-dealer. II. A registered representative's sibling has some old bonds that the representative sells as a favor through a municipal securities broker. III. A registered representative helps an old school friend issue securities for a small business under formation. IV. A registered representative helps an acquaintance sell some inherited stock certificates without the acquaintance becoming a customer of the firm. A. I and III B. III and IV C. I and II D. II and IV

B. (A private securities transaction is any sale of securities outside the scope of the regular business of the associated person involved and of the broker-dealer firm. Such a transaction done for an immediate family member, however, does not fall under the definition.)

During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend? A. Convertible B. Adjustable rate C. Callable D. Participating

B. (Adjustable-rate preferred dividends are tied to benchmark interest rates, such as Treasury securities. As these rates fluctuate up and down, so do the dividends on the adjustable shares.)

Your customer opens a position at 45 and then closes it later at 47. This represents A. a 2 point gain B. a 2 point gain or loss C. a 2 point loss D. a 47 point gain

B. (Because we do not know if the opening transaction was a buy or a sell from what we are told, this could be either a 2-point gain or loss. If the opening transaction was a buy, this represents a gain (bought at 45, sold at 47). But if the opening transaction was a sell, this represents a 2-point loss (sold at 45, bought back at 47).)

A customer of a broker-dealer purchases 100 shares of XYZ stock at $50 per share on Monday. Later that week, a confirmation arrives electronically indicating that the total cost of the transaction was $5,000. The client is puzzled that there is no additional charge for commission. The most likely reason for that is A. XYZ stock probably dropped significantly between the trade date and the sending of the confirmation so the BD waived the commission B. the BD acted as principal in the trade C. there is a mistake on the confirmation D. the BD acted as an agent in the trade

B. (Broker-dealers must always indicate their capacity on the confirmation. If the client had looked, there would have been a statement something to the effect of "we acted as principals in this trade". When the firm does that, there is no commission; there is a markup (in the case of a buy) or a markdown (in the case of a sell). In this instance, the actual price of the stock would have been lower than $50 per share and the BD marked it up to $50. (e.g., price of $49.50 with a .50 markup = $50) When the firm is acting as an agent however, commissions are always disclosed.)

Which of the following accurately characterizes capital risk? A. It is potential for loss due to an issuer's financial strength B. It can be reduced by diversification C. It is minimal when investing in derivatives, such as options D. It is always high when investing in government securities

B. (Capital risk is one of the nonsystematic risks that can be reduced by diversification. It represents the potential for loss due to circumstances unrelated to an issuer's financial strength. While it is considered minimal to none for U.S. government securities, it is generally high for derivative products, such as options.)

At a shareholders' meeting, a mutual fund investor might be called upon to vote on any of the following EXCEPT I. changes in membership in the board of directors II. whether to sell a certain company's stock out of the portfolio III. approval of investment adviser's contract IV. changing to a new landscaper for the fund's headquarters A. I and III B. II and IV C. II and III D. I and IV

B. (Like other shareholders, mutual fund investors vote their shares on crucial corporate decisions, such as membership of the board, and approval or ratification of an investment adviser's contract. Which stocks to sell out of the portfolio is up the investment adviser. Day-to-day business decisions, such as those regarding contractors to employ, is up to those who report to the board of directors.)

Which of the following securities is exempt from the Securities Act of 1933 A. Common Stock B. Municipal note C. Debenture D. Preferred Stock

B. (Municipal debt securities including short term notes are exempt from the Securities Act of 1933.)

An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place? A. Warrants will be distributed to existing stockholders and they will have 2 - 5 years to decide whether or not to buy the stock at the strike price B. Rights will be distributed to existing stockholders with an exercise price lower then the current market value C. Warrants will be distributed to existing stockholders with an exercise price equal to the current market value. D. Rights will be distributed to existing stockholders; they have only 2 options: exercise the rights or let them expire

B. (Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30-45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.)

The Investment Company Act of 1940 classified all the following as investment companies EXCEPT A. management companies B. private investment companies C. face-amount certificates D. unit investment trusts

B. (The 3 classifications established under the Investment Company Act of 1940 are face-amount certificates, unit investment trusts, and management companies (open and closed-end funds). Private investment companies do not come under the Act of 1940.)

The Federal Reserve Board (FRB) does all of the following EXCEPT A. regulate and impact the money supply B. enact fiscal policy C. supervise the printing of currency D. determine monetary policy

B. (The FRB determines monetary policy (not fiscal) and takes actions to implement its policies, including but not limited to regulating the U.S. money supply and supervising the printing of currency.)

Collateral Trust Bonds

Bonds backed by financial assets.

income bonds

Bonds that pay no interest unless the issuing company is profitable. (Unsecured debt security.)

If a registered representative is involved in a securities transaction outside the scope of employment with the firm, a practice known as "selling away," and will receive compensation for it, which of the following must see that the representative is properly supervised for the transaction? A. The firm where the trade will take place B. A FINRA examiner C. The employing firm D. Non because there is not supervisory requirement

C. (If a registered representative is to be compensated for a trade done through another firm, the employing firm must run the trade on its own books and see to it that the representative is properly supervised. The firm where the outside trade will take place is, of course, responsible only for the actions of its own registered representatives.)

An investor purchases 1 KLP October 95 put at 6.50. What is the investor's maximum potential gain with this position? A. $10,150 B. $9,650 C. $8,850 D. $9,500

C. (The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). Because one contract represents 100 shares, the owner's maximum gain is $8,850 and would occur if the stock falls to zero. Remember, put buyers are bearish; therefore, they will make money if the stock falls below the breakeven point—in this case, below 88.50.)

All of the following is TRUE about local government investment pools (LGIPs) EXCEPT A. Pools are not required to register with the SEC B. The pool maintains a fixed $1.00 net asset value C. Investors must be provided a prospectus at or before they purchase shares in the investment portfolio D. LGIPs operate similarly to a money market instrument

C. (The operating characteristics of LGIPs are similar to those of money market funds, and they keep a $1.00 NAV. They are not required to register with the SEC and therefore there is no prospectus but do provide information statements, which include details of the management fees.)

An investor sells (writes) put options on MAS stock. This investor is A. bearish on the MAS stock B. neither bearish nor bullish on the MAS stock C. bullish on the MAS stock D. both bullish and bearish on the MAS stock

C. (Those who sell put options may be obligated to buy the stock at the strike price if the contract is exercised by the owner. Being in a position to own the stock makes the investor bullish on the stock.)

A customer investing in common equity securities could realize all of the following EXCEPT A. potential hedge against inflation B. current income via dividend declarations C. protection of principal investment D. potential capital appreciation

C. (While common shareholders could realize potential capital appreciation, current income via dividend declarations and a potential hedge against inflation, protection of the initial investment is not guaranteed. Common shareholders have limited liability, meaning that while they cannot lose more than was initially invested, they could still lose all of it.)

Sovereign Risk

Credit risk of a sovereign bond outside of the investor's home market

While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be A. participating B. convertible C. callable D. adjustable rate

D. (Because the dividend payment adjusts to current interest rates, the price of the stock remains relatively stable. In other words, it is the return that fluctuates rather than the price.)

Some institutions can function as a depository and intermediary for settling transactions between buyers and sellers of securities. All of the following are acceptable for this purpose EXCEPT A. carrying firms B. the Depository Trust Company C. the National Securities Clearing Corporation D. national banks

D. (Being a bank alone does not allow for serving as a depository or clearing facility for securities transactions. The National Securities Clearing Corporation and the Depository Trust Company are set up specifically to perform these functions, and they may also be performed by broker-dealers known as carrying or clearing firms.)

All of the following are bullish positions EXCEPT A. long warrants B. long stock C. long calls D. short stock

D. (Bullish, anticipating that the security's price will rise, is associated with owning the security—having a long position. Therefore, owning securities that can be converted into the stock, such as being long calls, rights, or warrants, would also be considered bullish positions.)

The category of correspondence, one of the three identified as being communications with the public, is defined as A. electronic communications only, that have been made available to 25 or fewer retail investors within the past 6 months B. written communications only, that have been made available to 25 or fewer retail investors within the past 6 months C. communications that are targeted only at individuals who currently maintain accounts with the broker dealer D. any written or electronic communications that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period

D. (Correspondence can be written or electronic. It can be targeted at either account holders or non-account holders of the broker/dealer. The criteria that makes the communication correspondence is that it is distributed to 25 or fewer retail customers within any 30 calendar-day period.)

Industries that tend to be highly sensitive to inflation, deflation and the ups and downs of business trends would BEST be described as A. Defensive B. Growth C. Keynesian D. Cyclical

D. (Cyclical industries are highly sensitive to business cycles (the ups and downs of business trends) and inflationary or deflationary trends. Most cyclical industries produce durable goods, such as heavy machinery, or material such as steel to be utilized by other industries like the automobile industry. Demand for such goods increases when we are in periods of prosperity but during recessions, the demand for such products declines as manufacturers postpone investments in new capital goods and consumers postpone purchases of these goods.)

A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are A. collateral trust bonds B. mortgage bonds C. debentures D. equipment trust certificates

D. (Debt securities issued by corporations backed by the assets the corporation owns and uses in its daily business are known as equipment trust certificates.)

An investor is long a January 30 call at 2. Maximum gain for this position is A. $320 B. $30 C. $28 D. unlimited

D. (For a long call option, the maximum gain potential is unlimited because the underlying stock can rise to some unlimited number—in theory, infinity. As the stock price rises, so too would the value of the call.)

A shareholders' meeting for ABC Corporation will take place in 8 days. A customer whose stock is being held in street name has not returned the proxy statements. Which of the following is TRUE? A. The member firm must ascertain how the investor wishes to vote the shares B. The member firm may not vote the shares under any circumstances C. The member firm votes the shares as recommended by the issuer's management D. The member firm may vote the shares as it wishes on minor matters

D. (If an owner of shares held in street name has not returned proxy statements earlier than 10 days before a shareholders' meeting, the member firm holding the shares may vote them as it sees fit, provided the matters voted on are minor. If they are major—for example, changing the direction of the business, offering additional stock, effecting a merger—the member firm may not vote the shares at all.)

Holding customer mail is consistent with your broker-dealer's in-house rules. Considering this, if requested to do so, the BD must A. await approval from FINRA B. have the customer request anew after 6 months and then each 3 months thereafter C. request approval from the SEC D. verify at reasonable intervals that the customer's instructions still apply

D. (If the BD chooses to hold customer mail, once requested to do so in writing the BD must verify at reasonable intervals that the customer's instructions still apply. The rule regarding holding customer mail does not require the BD to request or get SEC or FINRA approval and there is no requirement that the customer make additional requests to continue having the BD hold mail.)

An investor who relies heavily on fixed interest payments from long-term (25-30 years) bonds should be most concerned with A. legislative risk B. reinvestment risk C. financial risk D. inflation risk

D. (Sometimes referred to as purchasing power risk, inflation risk is the effect of rising prices over a long period while an investor is collecting fixed interest payments. For example, if a bond's yield is lower than the inflation rate, the purchasing power of the interest payments received diminishes over time.)

The allowable deduction for equipment used in an oil and gas direct participation program is taken as A. credit applied at the end of the program B. a one time expense applied at the end of the program C. depletion applied when the equipment is sold D. depreciation over the life of the program

D. (Tangibles such as equipment that will have some salvage value at the end of the program can be depreciated. The depreciation is an allowable deduction taken over the life of the program.)

Which of the following is not a category of communications with the public designated by FINRA? A. retail B. correspondence C. institutional D. Market letters

D. (The three categories of communications with the public designated by FINRA are retail, correspondence, and institutional. Market letters, as all sales or advertising pieces would, can fall under any of the three communications categories depending on to whom they are sent or made available to, and the number of recipients.)

An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call realized by the investor would be A. greater the CY B. equal to the YTM C. greater than the YTM D. less than the coupon

D. (When a bond purchased at a premium (105) is called before it matures, the accelerated premium loss is reflected in the calculated YTM and YTC. In this light, remember that the YTC is always the lowest of all possible yields for premium bonds, less than the coupon, CY, and YTM.)

American Depository Receipts (ADRs)

Foreign shares held by a custodian, usually a U.S. bank, in the issuer's home market and traded in dollars on the U.S. exchange

inflation risk

The danger that money won't be worth as much in the future as it is today

Reinvestment Risk

The risk that a decline in interest rates will lead to a decline in income from a bond portfolio

Regarding the potential financial exploitation of seniors, impacted accounts would be those for individuals

age 65 and older, or age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.

Coverdell Education Savings Account

an investment account through which individuals can save for education expenses on a tax-exempt basis

Equipment Trust Certificates

bonds secured with factory and equipment as collateral

cyclical industries

industries with above-average sensitivity to the state of the economy