Final SIE

A syndicate member in a Western account takes $3,000,000 out of a $15,000,000 underwriting. At the termination of the syndicate, $4,000,000 of the issue remains unsold while the member sold $2,200,000. This syndicate member's remaining liability is: A. $300,000 Correct B. $800,000 C. $1,000,000 D. $1,800,000

The best answer is B. A Western syndicate account is divided as to selling responsibility and divided as to liability. The member is only responsible for what the member was supposed to sell. The member is initially responsible for $3,000,000 - since the member sold $2,200,000, the member is only responsible for $800,000 of the $4,000,000 that remains unsold.

A wealthy retired investor is interested in buying Agency mortgage backed securities collateralized by 30-year mortgages as an investment that will give additional retirement income. When discussing this with the client, you should advise him that if market interest rates fall: Correct A. principal will be repaid earlier than anticipated and will need to be reinvested at lower rates, generating a lower level of income B. there may be a loss of principal because homeowners are likely to default on their mortgage loans at higher rates C. the maturity of the security is likely to extend and principal will be returned to the customer at a slower rate than anticipated D. he will be able to sell the mortgage backed securities at a large profit because of their long maturity

The best answer is A. If market interest rates fall, the homeowners will repay their mortgages faster because they will refinance and use the proceeds to pay off their old high rate mortgages that collateralize this mortgage-backed security. In effect, the maturity will shorten and the investor will be returned principal faster, which will have to be reinvested at lower current rates - another example of reinvestment risk. The rate of homeowner defaults has no effect on the principal repayments to be received because the Agency guarantees principal repayment - making Choice B incorrect. Maturities will only extend if market interest rates rise and homeowners stay in their houses (they don't move because new mortgages are more expensive), and principal is repaid more slowly than expected. Thus. Choice C is incorrect. In a falling interest rate environment, because the maturity will shorten, these securities will not rise in price at the same rate as conventional long-term bonds. Thus, Choice D is incorrect.

All of the following are considered to be "insiders" EXCEPT: Correct Answer A. an investor holding 11% of ABC preferred stock B. the in-house counsel of ABC Corporation Incorrect Answer C. the spouse of ABC Corporation's President D. ABC Corporation's Chief Executive Officer

The best answer is A. An insider is defined as an officer, director, 10% common shareholder or "affiliated person." The Chief Executive officer of the corporation is an officer; the President's spouse is an "affiliated person." Court decisions have extended the definition of an insider to include almost anyone who has "material non-public information" about the company. Because of this, an in-house lawyer is considered an "insider." An investor who holds non-convertible bonds or preferred stock of the company is not an insider - he or she is not in a position to get non-public information.

An unmarried person, earning $100,000 a year, is not covered by a pension plan and has been contributing to an IRA account annually. If this individual joins a corporation at the same salary, and is included in that company's pension plan, which statement is TRUE? Correct Answer A. Annual contributions to the IRA can continue but will not be tax deductible Incorrect Answer B. Annual contributions to the IRA can continue and continue to be tax deductible C. Annual contributions to the IRA must cease D. The IRA must be closed and the balance transferred to the pension plan

The best answer is A. Anyone who has earned income can contribute to an IRA, whether covered by a pension plan or not. However, the contribution is not tax deductible for individual employees covered by a pension plan who earn over $74,000 in year 2019 (the deduction phases out between $64,000 - $74,000 of income).

Which statement is TRUE when comparing arbitration to litigation as a means of settling disputes? Correct A. Arbitration is a faster and cheaper means of settling disputes than litigation B. Litigation is a faster and cheaper means of settling disputes than arbitration C. Both methods are comparable as to cost and time involved for dispute resolution D. Litigation is the normal method of dispute resolution in the securities industry as compared to arbitration

The best answer is A. Arbitration is preferred over litigation as a means for settling disputes because it is simpler and cheaper. Under FINRA rules, arbitration is mandatory for settling all disputes where a member firm or its personnel are involved.

The principal difference between an open end management company and a closed end management company is: Correct Answer A. capitalization B. management Incorrect Answer C. investment objective D. expense ratio

The best answer is A. Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange or NASDAQ where they trade. Therefore, open-end and closed-end funds are capitalized differently. The expense ratio of a fund measures of the "cost" of running the fund, and applies to both open and closed end funds (the largest component of the cost of running either type of fund is the annual management fee).

Call loans made by bank to broker-dealers are secured by which of the following? I Customer margin securities II Fully paid customer securities III Firm securities positions IV Customer securities positions in cash accounts Correct A. I only B. II and IV C. II, III, IV D. I, II, IV

The best answer is A. Call loans are secured by customer margin securities. Fully paid customer securities cannot be pledged for these loans - they must be segregated and placed in safekeeping. The loans are not secured by cash nor do firm securities positions collateralize these loans. Loans using firm securities as collateral (proprietary positions) must be kept separate from loans using customer securities as collateral.

The social security number(s) that is (are) used for Internal Revenue Service reporting in a custodian account is (are) the: Correct A. minor's social security number B. custodian's social security number C. account has the choice of using either the minor's social security number or the custodian's social security number D. parent's social security number

The best answer is A. Custodian accounts use the social security number of the minor.

Dividends on preferred stock may be paid in: I Cash II Common shares of the same issuer III Common shares of another issuer IV Preferred stock of the same issuer Correct Answer A. I only B. II and III only Incorrect Answer C. I and IV only D. I, II, III, IV

The best answer is A. Dividends on preferred stock are paid solely in cash. Dividends on common stock may be paid in cash; stock; stock of another company (such as shares of a subsidiary company) or products of that company.

Which of the following can be purchased on margin? A. Mutual Funds B. Initial public offerings of Closed End Funds Correct C. Closed End Funds trading on the NYSE D. New issues of stock

The best answer is C. New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the original offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock.

Which of the following statements are TRUE regarding Federal Funds? I Federal funds are overnight loans between member institutions of the Federal Reserve System II Federal funds are overnight loans of reserves from the Federal Reserve Bank to a member institution III The interest rate charged on Federal Funds is the Federal Funds Rate IV The interest rate charged on Federal Funds is the Discount Rate Correct A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Federal Funds are overnight loans of reserves from Fed member bank to Fed member bank. The interest rate charged on Fed Funds is the Federal Funds Rate. When the Federal Reserve Bank lends directly to a member bank, it does so at the discount rate.

Which statement is TRUE about entering trades into a custodian account? Correct A. Only the custodian can enter trades B. Only the minor can enter trades C. Only the donor can enter trades D. Only the parents can enter trades

The best answer is A. In a custodian account, only the custodian is permitted to trade. Anyone can donate into such an account.

In a negotiated municipal underwriting, which of the following is disclosed to customers? Correct A. Spread B. Names of the Underwriters C. Participations of the Underwriters D. Expenses of the Underwriters

The best answer is A. In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters, nor their participation amounts or expense allocations.

Industrial development bonds: I are backed by rental revenues paid by the corporate lessee II are backed by the municipality's ad valorem taxes III take on the credit rating of the corporate lessee IV take on the credit rating of the municipal lessor Correct A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Industrial development bonds are backed by the rental revenues paid by the corporate lessee as well as by the guarantee of the corporate lessee. These bonds, therefore, take on the credit rating of the corporation leasing the facility.

Which of the following statements are TRUE about new stock offerings? I New issues are sold under a prospectus II New issues are not sold under a prospectus III New issues are sold at the Public Offering Price IV New issues are sold at the Public Offering Price plus a commission or mark-up Correct Answer A. I and III B. I and IV Incorrect Answer C. II and III D. II and IV

The best answer is A. New stock issues are sold under a prospectus that states the Public Offering Price, which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.

Which of the following is the most likely purchaser of STRIPS? Correct Answer A. Pension fund B. Money market fund C. Individual seeking current income Incorrect Answer D. Individual wishing to avoid purchasing power risk

The best answer is A. Pension funds and retirement accounts are the large purchasers of STRIPS. These zero-coupon bonds are purchased at a deep discount and are held to maturity to fund future retirement liabilities. There is little credit risk, because the U.S. Treasury is a top credit. There is no current income because they don't pay until maturity. They have a huge amount of purchasing power risk as a long-term zero coupon obligation, but this is not an issue if they are held to maturity. Retirement plan managers like STRIPS because they don't have to worry about reinvestment risk - there are no semi-annual interest payments to reinvest! It is an investment that can be "tucked away" for 20 or 30 years, with no further work or worry on the part of the retirement fund manager.

A customer sells short 100 shares of PDQ at $58 and buys 1 PDQ Jul 60 Call @ $3. The breakeven point is: Correct A. $55 B. $57 C. $61 D. $64

The best answer is A. The customer sold the stock for $58 and paid $3 in premiums for the long call, for a net receipt of $55. To breakeven, the customer must buy back the stock position at this price. To summarize, the formula for breakeven for a short stock / long call position is: short stock/long call breakeven = short sale price - premium

The maximum gain for the writer of a call is: Correct Answer A. the premium received Incorrect Answer B. unlimited C. strike price minus premium received D. strike price plus premium received

The best answer is A. The maximum gain for the writer of a call occurs if the market price drops and the call expires "out the money." In this case, the call writer keeps the collected premium. However, if the market price rises, the call will be exercised and the writer must deliver the stock at a fixed price. Since the stock must be purchased at a higher market price for delivery, the loss potential for the call writer is unlimited. To breakeven, the premium received must be lost in a rising market. This occurs if the market price rises to the strike price plus the premium paid.

An individual earning $60,000 in 2019 makes an annual contribution of $2,000 to a Traditional IRA. Which statement is TRUE? Correct Answer A. This person can contribute a maximum of $4,000 to a Roth IRA B. This person can contribute a maximum of $5,000 to a Roth IRA Incorrect Answer C. This person can contribute a maximum of $6,000 to a Roth IRA D. This person is prohibited from contributing to a Traditional Individual Retirement Account in that year

The best answer is A. The maximum permitted annual contribution to a Traditional IRA or Roth IRA for an individual is $6,000 total in 2019. This can be divided between the 2 types of accounts. In this case, since $2,000 was contributed to the Traditional IRA, another $4,000 can be contributed to a Roth IRA for that tax year. Also note that this individual's income is too low for the Roth IRA phase-out (which occurs between $122,000 and $137,000 for individuals in 2019).

A closed-end management company is a: A. mutual fund Correct B. publicly traded fund C. fixed unit investment trust D. participating unit investment trust

The best answer is B. A publicly traded fund has a 1 time stock issuance; closes its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a "closed-end" fund - that is, closed to new investment.

A well that is drilled on leases not adjacent to proven reserves is known as a: A. step-out well Correct B. wildcat well C. service well D. stripper well

The best answer is B. A wildcat well is one that is drilled in an exploratory program away from all existing fields. Since the mineral rights cost is low for unproven areas, an oil find can result in large profits.

Which of the following statements are TRUE regarding a life annuity? I The shorter the expected annuity period, the larger the monthly payment II The longer the expected annuity period, the larger the monthly payment III A life annuity usually pays the largest amount of all of the annuity payment options IV A life annuity usually pays the smallest amount of all of the annuity payment options Correct A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. The shorter the time period to "expected death" when the separate account is annuitized, the larger the monthly payment will be; conversely the longer the time period to "expected death" when the separate account is annuitized, the smaller the monthly payment will be. Regarding annuity payment options, this must be looked at from the standpoint of the insurance company, that has a large pool of annuitants to cover. The insurance company can afford to pay a larger payment to those persons who it expects will be paid for the shortest time period; it will make smaller monthly payments when it expects to pay for a longer time period. A life annuity lasts only for that person's life - this is the shortest expected period of the annuity payment options. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.

Which statement is TRUE about a minor in a custodian account under UGMA (Uniform Gifts To Minors Act) reaching legal age? Correct A. The account must be transferred into the name of the new adult B. The account is transferred into the name of the new adult when requested by the custodian C. The account is transferred into the name of the new adult when requested by the parents D. The account must be liquidated and the proceeds paid to the new adult

The best answer is A. Under UGMA, when a minor in a custodian account reaches legal age, then the new adult simply presents proof of age, along with a government issued photo I.D. and the account is transferred into that person's name only.

On November 23rd, an officer of MNO Corporation wishes to sell stock under Rule 144. MNO has 50,000,000 shares outstanding. The previous weeks' trading volumes are: Week Ending Volume Nov 21 Nov 14 Nov 7 Oct 31 Oct 24 500,000 shares 525,000 shares 485,000 shares 450,000 shares 400,000 shares If the Form 144 is filed today, the maximum sale is: A. 490,000 shares Correct B. 500,000 shares C. 506,250 shares D. 515,725 shares

The best answer is B. Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 50,000,000 shares = 500,000 shares. The last 4 weeks' trading volumes are: 500,000 shares 525,000 shares 485,000 shares 450,000 shares 1,960,000 shares / 4 weeks = 490,000 share average The greater amount is 1% of outstanding shares, or 500,000 shares.

An individual owns a bicycle repair business as a sole proprietorship. He does not make a lot of money, but he does have $5,000 available for investment this year. The BEST recommendation for this individual is to make a $5,000 contribution to a(n): A. Traditional IRA Correct Answer B. Roth IRA Incorrect Answer C. SEP IRA D. SIMPLE IRA

The best answer is B. Since this individual does not make a lot to money, a tax-deductible Traditional IRA contribution would not produce significant tax savings. When distributions from the Traditional IRA are taken at retirement, they are taxable. A Roth IRA does not permit a deduction for the contribution, but when distributions are taken at retirement age, there is no tax due. Roth IRAs are a very good deal, but they are not available to high-earning individuals. This question states that the individual does not earn a lot of money, so this is not an issue. SEP IRAs are designed for small businesses. These are "Simplified Employee Pension" plans that do not have to comply with ERISA. The employer establishes the plan and makes deductible contributions for the employees. The employer has the flexibility to change the amount contributed each year. A sole proprietor would not use this type of plan. SIMPLE IRAs are also designed for small businesses and do not have to comply with ERISA. They are similar to 401(k) plans because the employee makes the contribution as a salary reduction. The employer must make a matching contribution (the "SIM" in SIMPLE stands for "Simplified Incentive Match") of either 2% of the salary of each employee or 3% of the salary of each employee who makes a salary-reduction contribution. Whether times are good or bad, the employer must make the match, so there is no flexibility as to the amount the employer contributes each year, as compared to a SEP IRA. Again, a sole proprietor would not use this type of plan.

"LIBOR" is the commonly used term for the: A. Long Term Bond Offered Rate Correct B. London Interbank Offered Rate C. Last-In, Best Offered Rate D. Lowest Interest Borrowing Offered Rate

The best answer is B. "LIBOR" stands for the London Interbank Offered Rate which is the rate on which most Eurodollar loans are based. Also, Eurodollar bond offering interest rates are typically based on LIBOR plus a spread. (e.g., - the rate charged on the loan might be LIBOR plus 1 point; or LIBOR + 2 points). Essentially, LIBOR is the European equivalent of the U.S. "Fed Funds" rate.

Which of the following best describes "structuring"? A. Depositing or withdrawing cash in amounts just over $10,000 Correct Answer B. Depositing or withdrawing cash in amounts just under $10,000 C. Diversifying among asset classes in amounts just over $10,000 Incorrect Answer D. Diversifying among asset classes in amounts just under $10,000

The best answer is B. "Structuring" is the illegal practice of making a pattern of deposits or withdrawals of cash in amounts under $10,000 to avoid currency transaction reporting rules.

Under FINRA rules, "suitability" means that: A. securities that are delivered on settlement are in "good" form Correct B. investment recommendations made to a customer are appropriate for that investor C. new accounts that are opened at the firm are of a similar nature to existing accounts D. registered representatives hired by the firm have passed all appropriate licensing examinations

The best answer is B. "Suitability" means that securities which are recommended to a customer are appropriate for that customer.

Which of the following municipal securities would be considered a "double barreled" issue? Incorrect Answer A. Revenue Bond backed by two sources of revenue Correct Answer B. Hospital Revenue Bond backed by Ad Valorem taxing power C. Moral Obligation Bond D. Bond Anticipation Note

The best answer is B. A "double barreled" bond is a revenue issue that is also backed by a municipal issuer's taxing power. A revenue bond backed by two sources of revenue is known as a parity bond since the bondholders have equal claim to both sources of revenue backing the bond issue.

Which of the following statements are TRUE regarding corporate reports sent to shareholders? I The 10K report consists of the annual financial statements II The 10K report consists of the quarterly financial statements III The 10Q report consists of the annual financial statements IV The 10Q report consists of the quarterly financial statements A. I and III Correct B. I and IV C. II and III D. II and IV

The best answer is B. Corporate annual reports are 10K reports which are audited reports. The 10Q is a quarterly report which is unaudited. Corporate annual reports contain the following audited financial statements - Income Statement; Balance Sheet; Statement of Changes to Retained Earnings; and Statement of Sources and Uses of Cash.

ERISA regulations cover: I public sector retirement plans II private sector retirement plans III federal government employee retirement plans A. I only Correct Answer B. II only C. III only Incorrect Answer D. I, II, III

The best answer is B. ERISA rules cover private retirement plans to protect employees from employer mismanagement of pension funds. It does not cover public sector retirement plans, such as federal government and state government plans, since these are funded from tax collections and are closely regulated.

The definition of Treasury stock is: A. authorized shares minus issued shares Correct Answer B. issued shares minus outstanding shares Incorrect Answer C. authorized shares minus outstanding shares D. capital in excess of par value minus par value

The best answer is B. If a company has the same number of issued shares as the number of shares outstanding, then no shares have been repurchased for the company's Treasury. However, if the company repurchases shares, the number of outstanding shares decreases. Thus, the definition of Treasury stock is issued shares minus outstanding shares.

Which of the following statements are TRUE about the Net Asset Value per share for a mutual fund? I The distribution of dividends to mutual fund shareholders affects the Net Asset Value per share II The distribution of dividends to mutual fund shareholders does not affect the Net Asset Value per share III The redemption of mutual fund shares affects the Net Asset Value per share IV The redemption of mutual fund shares does not affect the Net Asset Value per share A. I and III Correct Answer B. I and IV Incorrect Answer C. II and III D. II and IV

The best answer is B. If a fund distributes a dividend to shareholders, the Fund shares are reduced by the value of the distribution on the ex date. Redemption of shares has no effect on Net Asset Value per share, because the redemption of each share occurs at the current Net Asset Value that day. The reduction in total net assets is exactly matched by a proportionate reduction in shares outstanding, so Net Asset Value per share is unchanged by the redemption.

Which of the following statements are TRUE regarding money market funds? I The Net Asset Value per share is constant at $1 II The Net Asset Value per share is constant at $10 III As Total Assets in the fund increase, the shareholder has the same number of shares at an increased Net Asset Value per share IV As Total Assets in the fund increase, the shareholder receives more shares at the same Net Asset Value per share Incorrect Answer A. I and III Correct Answer B. I and IV C. II and III D. II and IV

The best answer is B. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

Which of the following Moody's MIG ratings are considered investment grade? I MIG 1 II MIG 2 III MIG 3 IV SG A. I only Correct B. I and II C. II and III D. I, II, III, IV

The best answer is B. Moody's rates municipal anticipation notes under the "MIG" (Moody's Investment Grade) ratings scale, with MIG 1 and MIG 2 being investment grades; and the non-investment grades being MIG 3 and SG ("Speculative Grade").

What is the cost basis to the recipient of an inherited securities position? A. The cost basis of the deceased person Correct B. The market value as of the date of death of the deceased person C. The market value as of the date the recipient liquidates the position D. The greater of the cost basis of the deceased person or the market value as of the date of death

The best answer is B. One benefit built into the tax code is that inherited securities are given a new cost basis to the recipient, using the date of death to value the securities. Thus, if the securities have appreciated, there is no capital gains tax due on death. This is called a "stepped up" basis.

The manager of a pension plan would most likely invest in which of the following debt issues? I Corporate Bonds II Municipal Bonds III Government Bonds A. I only Correct Answer B. I and III only Incorrect Answer C. II and III only D. I, II, III

The best answer is B. Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower interest rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher interest rates because their interest income is taxable by the Federal government.

A client sells stock in a regular way trade in a listed stock on Thursday. The client knows that settlement takes place in 2 days and asks the representative if the funds will show in his account on Saturday. The representative should tell the client that the settlement date when the proceeds will be reflected in the account will be: A. that Saturday Correct B. the Monday following that Saturday C. the Tuesday following that Saturday D. the Wednesday following that Saturday

The best answer is B. Regular way settlement is 2 business days following trade date. If a regular way trade takes place on a Thursday, 2 days later is Saturday. However, 2 business days later is Monday, and that is the date the trade would settle.

Under Regulation D regarding private placements, how many non-accredited investors are allowed to invest in the offering? A. 10 Correct Answer B. 35 C. 50 Incorrect Answer D. An unlimited number

The best answer is B. Regulation D permits a private placement to be sold to a maximum of 35 non-accredited investors and an unlimited number of accredited (wealthy and institutional) investors.

Generally, new issues cannot be margined for how many days after issuance? A. 10 days B. 20 days Correct C. 30 days D. 90 days

The best answer is C. New issues are not marginable for 30 days after issuance. After that point, they are "seasoned" and are marginable if the securities are listed on an exchange or NASDAQ.

General creditor status in the liquidation is given to any customer claims that are: Incorrect Answer A. below Securities Investor Protection Corporation coverage limits Correct Answer B. above Securities Investor Protection Corporation coverage limits C. for securities held in margins accounts that had a debit balance D. for cash balances below $250,000

The best answer is B. Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit. For any uncovered claim amounts above these limits, the customer becomes a general creditor of the failed broker-dealer. Coverage limits apply to both cash and margin accounts.

A customer places an order to buy bonds. The order reads "Buy 5M ABC 9s M '35 @ 90 GTC." The customer has entered a: A. stop order to buy at 90 Correct B. limit order to buy at 90 C. market order to buy D. stop limit order to buy

The best answer is B. Since a price is specified with no other qualifications, this is a limit order to buy $5,000 face amount ("5M") of 9% bonds maturing in 2035. The customer wants to pay 90% of par for the bonds or less. Open buy limit orders are executed if the market drops.

A convertible bond is convertible into common stock at a 32:1 ratio. The common stock is currently trading at $30. The bond is currently trading at $980. What is the bond's parity price? A. $940 Correct B. $960 C. $980 D. $1,000

The best answer is B. The bond's parity price is found by taking the stock's market price and multiplying this number by the conversion ratio. $30 X 32 = $960.

A customer in the 28% tax bracket has $5,000 of capital losses and $3,000 of capital gains. How much net capital loss is deductible from this year's tax return? Incorrect Answer A. $0 Correct Answer B. $2,000 C. $3,000 D. $5,000

The best answer is B. The customer has a capital gain of $3,000 and a capital loss of $5,000, for a net capital loss of $2,000. The entire net $2,000 loss is deductible since it does not exceed the maximum $3,000 per year net capital loss deduction.

Which statements are TRUE regarding closed end investment companies? I The initial offering of shares is made under a prospectus II Shares are redeemable with the issuer at Net Asset Value III Shares trade in the secondary market at prevailing market prices IV The portfolio of investments is not managed A. I and II only Correct B. I and III only C. III and IV only D. I, III, IV

The best answer is B. The initial offering of closed end investment company shares is made under a prospectus. Then the shares are listed on an exchange and trade like any other stock. The shares are not redeemable; they are negotiable. The portfolio of investments is managed - this is a closed-end management company.

What investment strategy would be used by a conservative stock investor seeking income? Incorrect Answer A. The purchase of a growth stock Correct Answer B. The sale of a call on stock owned C. The purchase of a blue-chip stock D. The purchase of an aggressive growth stock

The best answer is B. The most popular income strategy for conservative stock investors is the sale of calls against the stock positions held - known as covered call writing. The premium collected from selling the call, in addition to the dividends collected on the stock, is the income from the strategy. If the stock falls, the call expires, but the customer still loses on the stock position. If the stock rises, it is called away, so the customer does not enjoy further upside gain. Note that Choice C is not bad - but blue-chip stock investments only pay dividends - whereas covered call writing generates premium income in addition to dividends - and this question asks about a "conservative investor seeking income."

An automobile manufacturer decides to distribute shares of its parts making subsidiary to existing shareholders as a separate operating company. This is a: A. break up Correct B. spin off C. fall out D. leveraged buy out

The best answer is B. This company is "spinning off" a subsidiary to its shareholders as a separate stock company. Larger companies do this when they feel that the subsidiary will be better managed; and have better business opportunities; as a legally separate operating company. Do not confuse a "spin off" with a "break up." A "break up" is a government ordered splitting up of a company; usually as a result of the company engaging in monopolistic practices.

Under the requirements of the USA PATRIOT Act, when opening a new account for a non-resident alien, which of the following must be obtained from the customer? A. Social security number Correct B. Passport number C. Driver's license number D. Major credit card number

The best answer is B. When opening a customer account for a non-resident alien, the customer's foreign passport number must be obtained. In addition, the customer must have a U.S. tax identification number.

Which of the following would be a quote for a manufacturing company bond? A. 99.50 B. 99-16 Correct C. 99 1/2 D. 99 8/16

The best answer is C. A manufacturing company bond is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 99 1/2 = 99.50% of $1,000 par = $995.00 per bond. Choice B is a U.S. Government bond quote in 32nds. 99-16 = 99 16/32nds = 99.50% of $1,000 par = $995.00 per bond. Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

Which statement is TRUE about index option contracts? Incorrect Answer A. They are custom OTC contracts where the terms are negotiated between buyer and seller B. They are available in either American or European style Correct Answer C. Exercise settlement is in cash D. Trade settlement is the same day

The best answer is C. Index option contracts, such as the SPX (Standard and Poor's 500 Index Option) allow an investor to bet on broader market movements, as opposed to individual stock price movements. They are standardized options contracts that are exchange traded. They are also useful to institutions that wish to hedge their portfolios, or that wish to generate extra income against their portfolios. They are more "potent" than individual stock options, because the value of the S&P 500 Index is so high (around 2,700), so in theory 1 contract covers 100 x 2,700 = $270,000 worth of stock. So, in theory, for an institution that wishes to hedge a portfolio, fewer contracts need to be purchased (lower cost hedging). Unlike stock options, index options are generally issued European style (exercise can only occur at expiration, not before). Exercise settlement is in cash, unlike stock options where exercise settlement results in a delivery of stock. Like stock options, index options can be traded anytime, and trade settlement is next business day for both.

A corporation has issued $10,000,000 of 7 1/4%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 40:1. The bond is currently trading at 120, while the company's common stock is at 24. The parity price per share is: A. $24 Incorrect Answer B. $25 Correct Answer C. $30 D. $40

The best answer is C. The bond is currently priced at $1,200. For the common stock to be trading at "parity," 40 shares (the conversion amount per bond) must be worth the same $1,200. $1,200 divided by 40 shares per bond equals $30 per share parity price. The parity price formula is: bond's price/conversion ratio = parity price $1,200/40 = $30

A customer that wishes to open a new account is asked by the registered representative for a government issued photo identification. The customer gives the representative a copy of his driver's license, which the representative notes has expired 3 months ago. Which statement is TRUE? A. Because the identification document was government issued, it can be used to verify the customer's identity Incorrect Answer B. As long as the identification has not expired more than 6 months ago, it can be used to verify the customer's identity Correct Answer C. As long as another non-documentary method is used to verify the customer's identity, the account can be opened D. This account cannot be opened unless the customer renews his or her driver's license and presents it to the member firm

The best answer is C. To open an account for a new customer, 4 critical pieces of information must be obtained before the account can be opened - customer name, mailing address, social security number, and birthdate. This information must be used to independently verify the customer's identity within a reasonable time after account opening. This verification can be done either by matching the 4 critical pieces of information to a valid government issued identification (which cannot be expired) or by using a database service to perform the match. (Regarding the expired driver's license in the question, the reason it cannot be expired is simple. Let's say that you were issued a new driver's license because your old one expired, so you toss the old one in the trash. The garbage man sees the old expired license, takes it and sells it to a person who specializes in identity theft. That thief would attempt to use the expired license to open accounts in your name! It's a nasty world out there!)

Which of the following are defined as "immediate family" for purposes of FINRA Rule 5130 on IPO distributions? I Financially independent parent of broker-dealer employee II Financially independent spouse of broker-dealer employee III Financially independent uncle of broker-dealer employee IV Financially dependent uncle of broker-dealer employee A. I and II B. III only Correct C. I, II, IV D. I, II, III, IV

The best answer is C. "Immediate family" consists of parents, children, spouses and siblings, as well as any in-laws of these individuals, and anyone who is a financial dependent. Excluded from the definition are grandparents, grandchildren, uncles and aunts - unless they are financial dependents.

A bond with a "C" rating is considered to be: Incorrect Answer A. lower medium grade B. lowest investment grade Correct Answer C. one having credit risk D. one having market risk

The best answer is C. A bond rated "C" is considered to be speculative and would have substantial credit risk. The ratings agencies cannot rate bonds for market risk - only for credit risk. The lowest investment grade rating is BBB. BB, and B ratings are considered to be medium grade. CCC, CC, and C are all speculative, with a C rating being the most speculative.

Which of the following securities are NOT required to be registered with the SEC? I American Depositary Receipts II Eurodollar Debt III Foreign Government Debt IV Municipal Debt A. I and II only B. III and IV only Correct C. II, III, IV D. I, II, III, IV

The best answer is C. ADRs (American Depositary Receipts) are non-exempt securities and must be registered with the SEC under the Securities Act of 1933. ADRs are the way that most foreign corporate issues trade in the United States. The bank that structures the ADRs handles the registration. Municipal debt, U.S. Government debt and Foreign Government debt are all exempt. Eurodollar bonds are sold outside the U.S. and thus do not fall under the Act.

Which statements are TRUE about federal taxation of contributions to 529 plans? I Contributions are tax deductible to the donor II Contributions are not tax deductible to the donor III A 1-time gift of up to 5 times the gift tax exclusion amount can be given that will not be subject to gift tax IV A 1-time gift of up to 10 times the gift tax exclusion amount can be given that will not be subject to gift tax A. I and III B. I and IV Correct C. II and III D. II and IV

The best answer is C. Contributions to 529 plans are not federally tax deductible. Any gifts above the annual gift tax exclusion amount ($15,000 in 2019) are subject to gift tax. Gift tax is paid by the donor, not the recipient. Note that a tax benefit offered by 529 plans is a 1-time gift that can be made into the account equal to 5 times the current gift tax exclusion, without the donor worrying about having to pay gift tax. Since the current exclusion is $15,000 in 2019, 5 times this amount or $75,000 can be donated as a 1-time gift and not be subject to gift tax.

A customer has been receiving confirmations and statements by mail and asks the registered representative if these can be sent by e-mail. The proper response is that this: A. cannot be done because physical paper confirmations and statements are required to be sent to customers under FINRA rules B. can be done if the customer requests by letter Correct C. can be done if the customer requests by e-mail D. can be done only with the approval of the branch manager

The best answer is C. Customer mailings can be sent by e-mail instead of through the physical mail system if the customer provides a valid e-mail address. This is done by the customer e-mailing the request for electronic mailings.

Execution of a trade routed to an ECN is: I guaranteed since the ECN is a market maker in the security II not guaranteed since the ECN executes trades solely by matching customer orders III subject to the "best execution" rule IV not subject to the "best execution" rule A. I and III B. I and IV Correct C. II and III D. II and IV

The best answer is C. ECNs - Electronic Communications Networks - do not act as dealers - only as agents, earning a fee on each successful transaction. Thus, there is no assurance that an order placed on an ECN will be filled. All orders sent by broker-dealers to any public marketplace are subject to the "best execution rule" - that is, the broker-dealer can only direct the order to the market posting the best price at that moment. If a number of markets are posting the same "best" price, then the broker-dealer can choose any of those markets to get the order - and can use "payment for order flow" as a deciding factor in the order routing.

The FINRA suitability rule requires a progression of suitability determinations that must be completed in which order? I Quantitative suitability II Reasonable basis suitability III Customer specific suitability A. I, II, III Incorrect Answer B. III, II, I Correct Answer C. II, III, I D. II, I, III

The best answer is C. FINRA requires that suitability determinations include multiple levels of review, which must occur in the following order: Reasonable Basis Suitability: This is a review of the features, returns, costs and risks of the recommended product or strategy. Only those products with the best combination can be recommended to clients. In essence, this rule requires that firms have an internal "recommended list" that has completed this review. In addition, in order to recommend the product, the registered representative must understand, and be able to communicate, the investment's features, returns, costs, and risks. Customer-Specific Suitability: Once the recommendation has completed "reasonable basis" suitability, that does not mean that it can be recommended to all customers. To recommend it to a customer requires that "customer-specific" suitability be determined. Quantitative Suitability: A single recommendation might be suitable for a customer, however a large number of similar recommendations might not be. It all depends of the customer's objectives, needs, and ability to pay for the recommended transactions. Note that the "Suitability" rule only applies to recommended transactions. It explicitly does not apply to unsolicited trades; and it also does not apply to institutional customers - only to retail customers.

For the year 2019, couples who are age 50 or over are permitted to make a maximum annual IRA contribution of: Incorrect Answer A. $12,000 B. $13,000 Correct Answer C. $14,000 D. $15,000

The best answer is C. For the year 2019, the maximum annual contribution for an individual into an IRA is $6,000. However, individuals age 50 or older can make an extra "catch up" contribution of $1,000, for a total permitted contribution of $7,000. For couples where at least 1 person works that are age 50 or older, this amount is doubled to $14,000.

If interest rates fall, issuers most likely will call: I preferred issues with low interest rates II preferred issues with high interest rates III preferred issues with low call premiums IV preferred issues with high call premiums A. I and III B. I and IV Correct C. II and III D. II and IV

The best answer is C. If interest rates fall, issuers most likely will "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. The "call premium" is any amount that the issuer will pay the preferred stockholder above par value as "extra" compensation for calling in the issue. Issuers are more likely to call in issues with low call premiums (lower extra cost to the issuer) than call in issues with high call premiums (higher extra cost to the issuer).

If the writer of an equity put contract is exercised, the writer must deliver: A. cash in 1 business day B. stock in 1 business day Correct Answer C. cash in 2 business days Incorrect Answer D. stock in 2 business days

The best answer is C. If the writer of an equity put contract is exercised, he is obligated to buy the stock at the strike price (paying cash) from the holder of the put. Settlement is 2 business days after exercise date - this is a regular way stock trade.

Which of the following statements is (are) TRUE regarding variable annuity contracts? I The principal amount is guaranteed prior to annuitization by the insurance company that issues the contract II The principal amount is guaranteed after annuitization by the insurance company that issues the contract III The contract holder loses control of the principal amount prior to annuitization IV The contract holder loses control of the principal amount after annuitization Incorrect Answer A. I and III only B. II and IV only Correct Answer C. IV only D. I, II, III, IV

The best answer is C. In a variable annuity contract, the principal amount is never guaranteed. The principal value may increase or decrease, depending on the performance of the separate account. The "investment risk" is borne by the contract holder, not the insurance company. Regarding the statement about the contract holder "losing control of the principal," this relates to the contract holder's ability to change the terms of the payout from the contract. Prior to annuitization, the contract holder is allowed to change his payout option, thus he has control over how the principal will be disbursed. However, once the contract is "annuitized," the contract holder cannot change the payout option - he or she loses control over the principal. (Please note that the term "losing control over the principal" does not refer to how the investment manager decides to invest the funds in the separate account.)

An index arbitrage trading desk places sequential buy orders at the market opening for securities included in the index to raise their price against the current index value. Which statement is TRUE? A. These transactions can only be effected on an upbid B. This is an illegal practice known as Marking To Market Correct C. This is an illegal practice known as Marking The Open D. This is an illegal practice known as Painting The Tape

The best answer is C. Marking The Open is trading at the open, or falsely reporting trades at the open, just to affect the stock's opening price. FINRA has disciplined program traders for "marking the open" violations. These firms attempt to arbitrage the difference between an index option's value (which can be based on market open, depending on the index option) against the actual prices of the securities that are included in the index. The illegal practice was placing sequential orders at the open for the securities in the index to either move their price up (or down), so that the index arbitrage position would show a profit.

Which of the following statements are TRUE regarding mortgage bonds? I Mortgage bonds are issued in term maturities II Mortgage bonds are secured by real property III Default of mortgage bonds is common during recessionary periods IV Mortgage bonds are commonly issued by utilities A. I and III only B. II and IV only Correct Answer C. I, II, and IV Incorrect Answer D. I, II, III, IV

The best answer is C. Mortgage bonds originated in the 1890s as a means of financing the growth of utility companies. As a means of lowering the interest cost to the issuer, bondholders were given a lien on all real property of the utility. In theory, if the issuer defaulted, the bondholders could sell that real property to repay the outstanding debt balance. Mortgage bonds are term issues; all of the bonds are issued at the same date and mature on the same date. A serial structure is not required since real property is not a depreciating asset (as is the case with rolling stock pledged as collateral for equipment trust certificates). At maturity, it is common for mortgage bond issuers to sell a "refunding" bond issue. A new mortgage bond issue is floated, with the proceeds used to retire the maturing debt. In essence, the issuer is rolling over the debt. Historically, mortgage bond defaults have been very low.

A customer places an order to sell 100 ABC at 12 Stop Limit, when ABC stock is trading at $13. The company is restructuring and has announced a special dividend of $2.85 to be paid to shareholders of record. On the ex date, the order will be: A. canceled B. reduced to $9.00 Correct Answer C. reduced to $9.15 Incorrect Answer D. executed at $12.00

The best answer is C. On ex dividend date, all open orders placed lower than the current market are reduced for cash dividends (except for orders placed DNR - Do Not Reduce). The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. The order was originally placed at $12. The adjusted order price is $12 - $2.85 reduction = $9.15 adjusted order price.

Payment for U.S. Government securities that are sold through auction is made on: A. Auction Date Incorrect Answer B. Auction Date + 1 Correct Answer C. Issue Date D. Issue Date + 1

The best answer is C. Payment for U.S. Government securities that are won at auction must be made on issue date (Thursday of the auction week for T-Bills and the 15th of the month for STRIPS, TIPS, Treasury Notes, and Treasury Bonds). Payment is to be made in cash, Federal Funds, or in similar maturing Government securities (effecting a direct "rollover" of that debt).

All of the following are covered under the Securities Exchange Act of 1934 EXCEPT: A. issuance of corporate annual reports B. registration of broker-dealers Correct Answer C. registration of new issues Incorrect Answer D. margin on securities

The best answer is C. Registration of new issues falls under the Securities Act of 1933. The Securities Exchange Act of 1934 requires registration of broker-dealers; prescribes the content of corporate annual reports; and gives the Federal Reserve the power to set margins on both new issues and secondary market securities.

A customer sells short 100 shares of ABC stock at $25 as an initial transaction in a new margin account. The customer must deposit: A. $625 Incorrect Answer B. $1,250 Correct Answer C. $2,000 D. $2,500

The best answer is C. Regulation T initial margin to sell short stock is 50% of $2,500 = $1,250. However, since this is a new account, it must meet the minimum initial margin of $2,000 needed to open an account. Therefore, $2,000 must be deposited.

A customer enters an order to sell 100 shares of ABC at 75 stop limit when the market price of ABC is 78. The tape then shows the following: The order will be elected at: A. 74.00 B. 74.50 Correct C. 75.00 D. 76.00

The best answer is C. Sell stop orders are placed lower than the current market and are elected (or triggered) at or below the stop price - here, the stop price is at 75. The first trade is at 77 - this is above the stop price. The next trade at 75 is at the stop price and elects the order. Then the order becomes a limit order to sell at 75 or better (or higher). The next trade is at 74.50 - this does not meet the limit price of 75 needed to sell. The next trade is at 74 - this also does not meet the limit price of 75 needed to sell. The next trade is at 76 and the order can be executed, as this is the first sale price that meets (or, in this case, is better than) the minimum $75 limit.

Which of the following can be a stabilizing bid for a new issue that has a Public Offering Price of $30 per share? I $29.75 II $29.88 III $30.00 IV $30.13 A. I and II only B. III and IV only Correct C. I, II, III D. I, II, III, IV

The best answer is C. Stabilizing bids can only be entered at or below the public offering price, never above. If the bid were allowed to be placed above the public offering price, it would make the issue instantly "hot" and this is prohibited.

State-sponsored education savings programs that permit contributions to build tax-deferred are known as: Incorrect Answer A. Coverdell Education Savings Accounts B. Education IRAs Correct Answer C. Section 529 plans D. Section 403(b) plans

The best answer is C. State sponsored education savings programs are "Section 529" plans. Coverdell Education Savings Accounts are a Federal plan.

The figures presented for GDP, Currency Value and Trade Balance show the change from 1 year ago. From the data presented above, which statements are TRUE? I The Japanese Yen depreciated against the U.S. Dollar during the past year II The Japanese Yen appreciated against the U.S. Dollar during the past year III American investors who held Japanese Yen over the past year experienced a gain IV American investors who held Japanese Yen over the past year experienced a loss A. I and III B. I and IV Correct C. II and III D. II and IV

The best answer is C. The Japanese Yen has appreciated 8% against the U.S. Dollar in the last year, so it has strengthened. American investors who held Yen gained over the past year, since the Yen appreciated.

A review of major newspapers across the United States reveals that "help wanted" advertisement lineage has been decreasing. This is a: A. coincident indicator showing that economic activity is likely to increase B. coincident indicator showing that economic activity is currently at low levels Correct C. leading indicator showing that economic activity is likely to be slowing down D. lagging indicator showing that economic activity has slumped

The best answer is C. The amount of "help wanted" advertising shows the current demand for labor. If the number of advertisements is increasing, this would show that employers plan future production. If it is decreasing, it shows that future production will be slowing. Thus it is a leading indicator, though is not included as one of the 10 leading economic indicators reported monthly. The employment indicators that are reported by the Bureau of Labor Statistics are: levels of employment, which are a coincident indicator, initial unemployment claims which are a leading indicator; and duration of employment which is a lagging indicator. Help wanted ad lineage is an indicator published by the Conference Board, in its "Help Wanted Advertising Index." (The Conference Board is an economic forecasting firm, that is mainly known for its consumer "Confidence Index.") The Help Wanted Advertising Index measures ad volumes in 51 leading newspapers in nine regions across the United States.

A customer account holds $100,000 of Negotiable Certificates of Deposit that are maturing. The customer has inquired about alternative investments that can be made with these funds. To make a suitable recommendation, inquiry should be made as to the customer's: I Liquidity requirements II Tax bracket III Other investments A. I only B. III only C. I and II only Correct D. I, II, III

The best answer is D. Common sense dictates that to make any recommendation to a customer, all of the choices should be evaluated - the customer's liquidity requirements, tax bracket, and other investments.

A customer purchases 100 shares of ABC stock at $34 and buys 1 ABC Jan 30 Put @ $2 on the same day in a cash account. Subsequently, the stock goes to $44 and the customer's put expires and the customer sells the stock in the market at the prevailing market price. The customer has a(n): A. $200 loss B. $800 loss Correct C. $800 gain D. $1,000 gain

The best answer is C. The customer buys the put for 2 and buys the stock at $34 per share. The customer purchases the Jan 30 Put as protection if the stock price falls below $30. If the stock does fall below $30 per share, then the customer would exercise the put, selling the stock at $30. This limits downside loss. In this case, the stock price rises to $44 and the put expires "out the money". The stock is sold at the prevailing market price. The stock that was purchased for $34, is sold for $44, for a profit of $10 per share. Since a premium of $2 was paid for the put, the net profit is $8 per share = $800 on the 100 shares owned.

If interest rates are rising rapidly, which U.S. Government debt prices would be MOST volatile? A. Treasury Bills B. Treasury Notes Correct C. Treasury Bonds D. Series EE Bonds

The best answer is C. The longer the maturity, the greater the price volatility of a negotiable debt instrument. Of the choices listed, Treasury Bonds have the longest maturity. Series EE bonds have no price volatility since they are non-negotiable.

Which of the following statements are TRUE for both mutual funds and variable annuities that are in the accumulation phase? I Distributions are taxable to the holder in the year the distribution is made II The underlying portfolios are managed III The Investment Company Act of 1940 is the regulating legislation IV The return to investors is dependent on the performance of the securities in the underlying portfolio A. I and II only B. III and IV only Correct Answer C. II, III, IV Incorrect Answer D. I, II, III, IV

The best answer is C. The underlying portfolios of mutual funds and variable annuities are both "managed," since separate accounts buy the shares of management companies. Both are regulated by the Investment Company Act of 1940, and have investors carry "investment risk" and corresponding gain potential. Dividends and capital gains in variable annuity separate accounts build tax deferred; mutual funds distributions are taxable. When a mutual fund distribution is made, tax liability arises. This is not the case with separate account distributions which must be reinvested.

Under MSRB rules, which of the following records must be kept for specified time periods? I Official Statements II Trade comparisons III Customer account statements IV Customer complaints A. I and II only B. III and IV only Correct Answer C. II, III, IV Incorrect Answer D. I, II, III, IV

The best answer is C. There is no requirement to keep Official Statements filed at the firm. The underwriter for the issuer files a copy of the Official Statement with the MSRB, which puts it up on its EMMA website for public access.

A "fund of hedge funds" is: I a closed end fund that invests in a selection of hedge funds II generally registered with the SEC and sold by prospectus only III subject to an extra layer of fees, including not only fund management fees, but also the fees charged by the underlying hedge fund managers IV tax inefficient as compared to traditional fund investments because aggressive trading by the underlying hedge fund managers typically results in ordinary income and short term gains; not long term gains A. I and II B. III and IV C. I, II, III Correct D. I, II, III, IV

The best answer is D. A "fund of hedge funds" is a closed end fund registered under the Investment Company Act of 1940 (and therefore sold with a prospectus) that makes investments in selected hedge funds. These "funds of funds" allow smaller investors to participate in alternate investments like hedge funds, though they generally have a minimum $25,000 investment amount, cutting out the truly small investor. In addition, these closed end funds are not listed on an exchange - they do not trade. Rather, they are issued either monthly or quarterly, and they are redeemed through tender offer by the sponsor. Since the underlying investments are hedge funds, these "funds of funds" are characterized by aggressive trading, high risk, and potentially high reward. The underlying hedge fund manager is compensated with management fees, in addition to the closed-end fund manager that selects the hedge fund investments earning management fees, so there is a double layer of fees to this investment. Because the underlying hedge funds are aggressively traded, resulting gains (and losses) tend to be short-term, making these tax-inefficient investment vehicles.

An investor buys 100 shares of an open-end investment company with a 5% contingent deferred sales charge. The sales charge is reduced by 1% for every full year that the fund is held. The investor redeems the 100 shares at an NAV of $20 per share after holding them for 3 months. The investor will receive: A. $2,000 B. $1,990 C. $1,980 Correct D. $1,900

The best answer is D. A contingent deferred sales charge is imposed if an investor redeems a mutual fund before holding the fund for a stated time period. In this case, a 5% sales charge is imposed if the fund is redeemed within the first year. Using the redemption price of $20 per share x .95 = $19 per share received by the investor after the sales charge is deducted. $19 x 100 shares = $1,900 received upon redemption.

All of the following are components of total long term capital of a corporation EXCEPT: A. Common Stockholders' Equity B. Preferred Stockholders' Equity C. Long Term Bonded Debt Correct D. Current Liabilities

The best answer is D. A corporation's long term capital consists of common stockholders' equity (common at par; capital in excess of par; and retained earnings); preferred stockholders' equity; and long term debt. These are all sources of long term capital for the corporation. Current liabilities are just that, bills that must be paid within 1 year. They are not a source of capital for a corporation.

The owner of an American style option can exercise the contract: A. only on the business day preceding the expiration date B. only on the expiration date C. at any time, up to, but not including, the expiration date Correct D. at any time, up to and including, the expiration date

The best answer is D. An "American Style" option is one that can be exercised at any time. In contrast, a "European Style" option is one that can only be exercised at expiration. American style options can be exercised up to and including the expiration date - and listed options expire on the 3rd Friday of the expiration month.

Notification to FINRA is required for which of the following events? I A registered representative is arrested for embezzlement II A registered representative is indicted under the Securities Exchange Act of 1934 for "insider" trading violations III A written customer complaint is received about a registered employee misappropriating customer funds IV A registered representative is arrested for assault and battery A. II and III only B. I, II, IV C. II, III, IV Correct D. I, II, III, IV

The best answer is D. FINRA does require notification for a variety of reasons. If a registered individual is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required. In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500. When FINRA gets the report, they review it to see if they should do nothing, suspend the person's registration, or expel the registered representative.

A corporation declares a cash dividend on Wednesday, December 1st. The record date is set at Tuesday, December 21st, with the dividend payable on Friday, December 31st. Based on this information, the ex date is set at Friday, December 17th. The "tax event" occurs on: A. Wednesday, December 1st Incorrect Answer B. Friday, December 17th C. Tuesday, December 21st Correct Answer D. Friday, December 31st

The best answer is D. For tax purposes, payments by issuers to securities holders are considered to be received as of the date the issuer sends the check. In this case, the check is sent on Friday, December 31st (payable date), therefore the income is taxable as of this date.

A customer sells 1 ABC Feb 45 Call @ $4 when the market price of ABC is 46. If the market value of ABC falls to $41 and stays there through February, the customer will: A. break even B. gain $300 C. lose $400 Correct D. gain $400

The best answer is D. If the market falls to $41, the 45 call expires "out the money" and the writer retains the $400 premium.

A customer buys 100 shares of ABC stock at $39 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer's maximum potential gain until the option expires is: A. $200 B. $300 C. $700 Correct D. $800

The best answer is D. If the market rises above $45 the short call will be exercised. The customer must deliver the stock that he bought at $39 for the $45 strike price, resulting in a $600 gain. Since $200 was collected in premiums as well, the total gain is $800. This is the maximum potential gain while both positions are in place.

A repurchase agreement is effected between two U.S. Government securities dealers. The interest charged under the agreement is the: A. coupon rate of the underlying U.S. Government securities, paid directly from the issuer to the securities' original buyer B. coupon rate of the underlying U.S. Government securities, paid directly from the issuer to the securities' original seller Incorrect Answer C. "repo" rate, paid by the buyer of the securities to the seller Correct Answer D. "repo" rate, paid by the seller of the securities to the buyer

The best answer is D. In a repurchase agreement between 2 government dealers, a government securities dealer "sells" securities to another dealer, with an agreement to buy them back at a later date. The selling dealer obtains cash, and for this, agrees to pay interest to the buying dealer. The interest rate charged is known as the "repo" rate - the repurchase agreement interest rate. The rate fluctuates with, and parallels, the Federal Funds rate.

Which of the following activities are allowed prior to the filing of the registration statement? I Sending a customer a "red herring" preliminary prospectus II Accepting an indication of interest from the customer III Accepting a deposit from the customer IV Accepting a firm order from the customer Incorrect Answer A. I and II B. III and IV C. II and IV Correct Answer D. None of the above

The best answer is D. Prior to the filing of the registration statement, nothing can be done. Once the registration statement is filed, a preliminary prospectus may be used to obtain indications of interest. Once the registration is effective, the final prospectus can be used to offer and sell the issue.

Which of the following statements are TRUE about tax shelters that invest in raw land? I Tax credits are allowed on raw land purchases II Tax credits are not allowed on raw land purchases III The main reason to invest in raw land is for the depreciation deduction IV The main reason to invest in raw land is for the appreciation potential A. I and III Incorrect Answer B. I and IV C. II and III Correct Answer D. II and IV

The best answer is D. Raw land is neither depreciable nor depletable. Nor are tax credits allowed on raw land purchases. The only reason to buy and hold raw land is for the appreciation potential.

An order for a New York Stock Exchange listed issue is routed by the member firm to a Third Market Maker rather than to the exchange floor. This practice is: A. prohibited B. permitted only if the customer consents C. permitted only if an attempt to fill the order on the NYSE fails Correct D. permitted if the price offered by the Third Market Maker is better

The best answer is D. SEC rules require that execution must occur at the "best market." If a stock is traded in multiple markets, then the order must be routed by the member firm to the market that is posting the best quote.

A customer has an account with a brokerage firm that is in receivership. The account holds $90,000 of securities and has a $50,000 debit. Which statement is TRUE regarding SIPC coverage? A. The account is covered for $90,000 B. The customer must deposit $50,000 to receive the $90,000 of securities C. The account is covered for $50,000 Correct D. The account is covered for $40,000

The best answer is D. SIPC covers the equity in a customer's account, with coverage not to exceed $500,000 equity per account in securities. However, cash coverage is limited to $250,000. This account has $90,000 of securities and a $50,000 debit, so the equity is $40,000. The customer will receive $40,000 worth of securities in the liquidation.

A trade takes place directly between a bank and an insurance company without the use of a broker. This trade took place in the: Incorrect Answer A. First Market B. Second Market C. Third Market Correct Answer D. Fourth Market

The best answer is D. The Fourth Market is direct trading of securities between institutions on ECNs (Electronic Communications Networks) such as Instinet or Archipelago. The systems bypass brokerage firms, and therefore brokerage commissions. Instead, the ECN charges a small matching fee.

A municipal securities representative wishes to give pen and pencil sets valued at $75 to each of his top 20 clients as presents. Which statement is TRUE? A. This action is prohibited because each single gift is in excess of the MSRB gift limit B. This action is prohibited because the aggregate value of the gifts is in excess of the MSRB gift limit C. This action is prohibited because the MSRB does not allow gifts to be given Correct D. This action is permitted

The best answer is D. The MSRB limits gifts related to one's activities as a municipal securities representative to $100 value per person per year.

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

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

In order to open a new account for an individual customer, all of the following information is required on the new account form EXCEPT: A. Date of birth B. Street address C. Social security number Correct D. Telephone number

The best answer is D. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information.

All of the following procedures are required to open an account for an employee of another municipal securities firm EXCEPT: A. Prior notice of the opening of the account must be given to the municipal employer B. Duplicate trade confirmations must be sent to the municipal employer Incorrect Answer C. Any instructions of the municipal employer must be followed Correct Answer D. Duplicate account statements must be sent to the municipal employer

The best answer is D. To open an account for an employee of another municipal securities firm, the MSRB requires that prior notice be given to the employing firm; and that duplicate confirmations of each trade be sent to the employer. There is no requirement to send duplicate statements to the employer. Also, any instructions of the employer regarding the account must be followed - for example, if the employer says "Don't open the account," then those instructions must be followed.

ABC Corporation has recently completed a $20,000,000 offering of 10% debentures due in 2035. Each bond was sold with a warrant attached that allows the holder to buy 10 shares of ABC common stock at $50 per share. The market price of ABC is currently $42. Which statement(s) are TRUE? I The warrants help to increase the issue's marketability II The warrants help to lower the interest cost on the issue III The warrants are "under water" IV The company will raise an additional $10,000,000 if the warrants are exercised Incorrect Answer A. I only B. I and II C. III and IV Correct Answer D. I, II, III, IV

The best answer is D. Warrants are "sweeteners" that are attached to bond and preferred stock offerings to make them more marketable. Because the warrants have potential value, the issue can typically be sold at a lower interest cost (higher price) than if the warrants were not attached. At issuance, the warrants are usually issued "out the money" - as in this example the warrants allow the stock to be purchased at $50 but the stock's current value is $42. Thus, these warrants are said to be "under water" and will not have real value until the stock price rises above $50. If the warrants are exercised, the 20,000 debentures issued ($20,000,000/ $1,000 par) can be converted into 10 shares of stock each for a total issuance of 200,000 shares. The company will receive $50 per share, for a total of $10,000,000.

A customer sells 2 ABC Jan 40 Calls @ $5 when the market price of ABC is at $39. The breakeven point is: Incorrect Answer A. $29 B. $30 Correct Answer C. $45 D. $50

The breakeven point for either the holder or writer of a naked call contract is the strike price plus the premium. Despite there being two contracts, it does not change the breakeven point - which is always computed on a per share basis. At $45, if the call is exercised, the writer must deliver the stock at $40 which she does not own. If the stock is purchased in the market at $45, the 5 point stock loss exactly offsets the 5 point premium received. To summarize, the formula for breakeven on a short call is: short call breakeven = strike price + premium

DUPA Corp. has a Price/Earnings multiple of 20 and a market price of $45. What was the corporation's Earnings Per Common Share? A. $.225 B. $.44 Correct C. $2.25 D. $4.44

he best answer is C. The Earnings per Share can be found by taking the: market price/multiple = earnings per share 45/20 = $2.25