Series 7
IPO excluded family member include
Parents, spouse, siblings, In-Laws, and Children. DOES NOT include Uncles, Aunts, and grandparents
Time Value
Premium which exceeds the intrinsic value
Open-End mortgage bond
Property can be used for subsequent loans
Open-End mortgage bond
Property can be used for subsequent loans. Equal value
Arbitrage
Purchase and sale of the same or similar security due to a price disparity in different markets. Stock is $50 on the NYSE and $45 on the Boston Stock exchange. Must be Long the Boston stock and Short the NYSE stock. Due to the time it takes to deliver.
SEC rule 144A permits the resale of non registered securities to? And not who?
QIB's and not individuals
RAN
Revenue anticipation notes
What is not of concern when exchanging shares between fund families?
Sales load, there is usually none when within the same family
General Obligation Bonds (GO)
Secured by taxes, finance non revenue producing projects. NO Flow of Funds Provision
During the 20-day cooling period for an IPO a syndicate member may ONLY do what
Send out a preliminary prospectus
Options are always taxed as what
Short term Capital gains or losses
REPO's
Short term money market instruments which are generally overnight transactions. -Most sellers are government securities dealers -Has an active secondary market -Are NOT riskless transactions
Class C shares are...
Short term. (Keep "C" girl short term)
Capital gains on short sales will always be
Short-term, never long term
Maximum gift tax for single person and married
Single - $15,000, Married - $30,000
Do common stockholders have the right to inspect the minutes of Board of Directors meetings?
No
1 Mill
$0.001
What TWO effects would a decline in interest rates have on a CMO? I.Increase the market price II.Decrease the market price III.Shorten the average life IV.Lengthen the average life
(A) I and III If interest rates decline, CMO prices will increase and the average life will be shortened due to refinancing and prepayment.
Under the regulations of the security industry, can unlisted securities be sold short by an OTC trader? (A) Yes, there is no restriction on such transactions. (B) No, because they are not marginable. (C) No, because it is against Federal Regulations. (D) Yes, but only on an uptick or zero plus tick.
(A) Yes, there is no restriction on such transactions
What is the typical settlement for a U.S. Treasury Bill with a 3-month maturity that is sold at the weekly auction on Monday with regular-way settlement? (A) Regular-way settlement would be 5 business days following the auction (B) Regular-way settlement would be 3 business days following the auction, or the Thursday following the auction. (C) Regular-way settlement would be the business day following the auction, or the Tuesday following the auction. (D) Regular-way settlement would be the same business day as the auction, or Monday.
(B) Regular-way settlement would be 3 business days following the auction, or the Thursday following the auction. Regular Way settlement in the auction market is T+3 In the secondary market is T+1
The regular way settlement date on U.S. Treasury Bonds is: (A) the same day as the trade date (B) the next business day after the trade date (C) two business days after trade date (D) four business days after the trade date
(B) the next business day after the trade date
Mary has sold 1 XYZ April 50 Call in her margin account. All of the following cover her call, EXCEPT: (A) 5 XYZ convertible bonds that can immediately be converted to 20 shares of XYZ common stock (B) A long position of 1,000 shares of XYZ common stock (C) A long position of 100 shares of XYZ preferred stock (D) A depository or escrow receipt showing that Mary holds 500 shares of XYZ common certificates in a safe deposit box
(C) A long position of 100 shares of XYZ preferred stock
When a customer opens a new cash account, the New Account Report form must be signed by: I. The customer II. The registered representative III. A principal of the firm (A) I only (B) I and II only (C) III only (D) I, II, and III
(C) III only
Principal payments of a collateralized mortgage obligation (CMO) are: (A) Paid in full as a lump sum at maturity (B) Paid in equal installments over the life of the CMO (C) Paid in varying amounts over the life of the CMO (D) Paid in full when the CMO is refunded.
(C) Paid in varying amounts over the life of the CMO
When trading OTC securities the difference between an All or None (AON)order versus a Fill or Kill (FOK)order is (A) FOK orders are good for the day entry (B) AON orders must be executed when entered or canceled (C) an AON will not be immediately canceled if it is not executed when it is entered (D) FOK orders are always entered as GTC
(C) an AON will not be immediately canceled if it is not executed when it is entered
The power authority of a municipality might issue tax-exempt commercial paper for all of the following reasons EXCEPT: (A) working capital (B) extraordinary expenses (C) partial payment of construction costs (D) advance refunding of outstanding bonds
(D) advance refunding of outstanding bonds Commercial paper is not issued to refund outstanding bonds
Using an annuity to fund a qualified retirement plan: (A) is unsuitable under any circumstances (B) is suitable if it is a fixed annuity but is unsuitable if it is a variable annuity (C) is unsuitable because the earnings in both the annuity and the qualified retirement plan are tax deferred and are therefore redundant (D) may be suitable because the annuity provides a guaranteed lifetime income during retirement and because of the death benefits provided.
(D) may be suitable because the annuity provides a guaranteed lifetime income during retirement and because of the death benefits provided.
Long Term Capital Gains
- held 12 Months PLUS 1 Day - Taxed at the Rate of 15% - (net long-term gain x .15 = tax liability)
Short Term Capital Gains
- held 12 Months or Less - Taxed at the investor's Ordinary Income Tax Rate - (net short-term gain x investor's rate = tax liability)
UIT's
-Issue reddemable units -Fixed portfolio of corporate and muni bonds -Not managed, no portfolio manager -When bonds expire, the trust is terminated
Keough Plan maximum contribution
100% of earned income up to a maximum of 55K
Copies of orders and names/addresses of beneficial owners
3 years, first 2 in readily accesible location
Form U-4 and U-5, fingerprints, and customer confirmations must be retained for...
3 years, first 2 in readily accesible location
Customer complaints must be retained for...
4 years, first 2 in readily accesible location
Monetary instruments must be retained for...
5 years
Customer account information, blotters, securities records and ledgers must be retained for...
6 years
1035 Exchange how many days?
7 Business days
Spread (Options)
A Long and a Short position in two SAME type of option, same stock, different expiration months and/or different strike prices. Buy a Call, Sell a Call on ABC - Call Spread Buy a Put, Sell a Put oin ABC - Put Spread
Advance Refunding
Non callable bonds, redeemed at the original maturity date. More than 90 days. NOT done to pay expenses or earn profits.
Current Yield
Annual Return / Market Value
Current yield
Annual interest/market price
Investment companies must provide investors with form 10-99 DIV how often?
Annually
Closed ended investment companies
Non redeemable shares, trade on exchange or OTC Prices are determined by suppl and demand Charge a commission
Good till cancelled order can buy what kind if securities?
All, common stock, preferred stock, bonds, and options
Qualified Annuity
An annuity where the investor contributes pre-tax dollars. Upon retirement the distributions are taxed as ordinary income A 403(b) tax-sheltered annuity (TSA) plan is a retirement plan, offered by public schools and certain tax-exempt organizations. An individual may only obtain a 403(b) annuity under an employer's TSA plan
All of the following accounts should be handled in a conservative manner with conservative investments in accordance with state laws and regulations EXCEPT FOR
An investment club
Federal securities are subject to which taxes and not subject to which
Are subject to federal income and are not subject to state and municipal taxes
A traditional IRA contributions are or are not tax deductible
Are tax deductible and taxes on contributions are tax deferred
When must you own a stock if you want to purchase it with a dividend?
At least one business day before the Ex-Date Cash - Is the business day after the Ex-Date
Stabilizing bids are done
At or below the IPO Price
The Markup Policy (5%) applies to
OTC Transactions and Riskless transactions
When do you have to sell a stock in order to receive the dividend?
On or after the Ex-Dividend date.
Revenue Bonds
Backed by user charges (Toll roads, airports, bridges), special taxes, or lease payments. Protective covenenats and Flow of Funds Provision.
BAN
Bond anticipation note
CMO
Bond secured by a pool of mortgage loans. Monthly income, trade OTC with markup or markdown. Interest fed and state tax. Implied call risk and extension risk
Income/adjustment bonds
Bonds issued by companies in or going into financial hardship (BK)
FHLMC's (Freddie Macs) are only issued in what form?
Book entry form
Accrued interest is paid by the buyer or seller?
Buyer
PACs are...
CMO's which resemble bonds and have a sinking fund structure.
When do you have to buy a stock in order to receive the dividend?
One business day prior to the ex-dividend date
Serial Bond
One issue date and staggered maturities
Checks are payable to both parties in which type of account? Joint Account with rights of survivorship or Joint Tenants with rights of surivorship
Only in JTWROS
Foreign currencies move in what direction in relation to the U.S. Dollar?
Opposite
Variable annuities are taxed as what?
Ordinary income
Pre Refunding
Original issue redeemed at earliest call date, within 90 days of call date.
Cost Basis of a bond
Original price paid for the bond and does not include the bonds accrued interest
A new client opens up a margin account at the firm. The client wishes to perform a short sale as their first transaction. They wish to sell short 1,000 shares of MNO corporation, which is currently trading at $2.25 per share. How much must this client deposit assuming no other deposits have been made at this time? [A] The client must deposit $1,125. [B] The client must deposit $2,250. [C] The client must deposit $2,500. [D] The client must deposit $4,500.
C. $2,500 EXPLANATION The minimum deposit required for low priced stock (0 - $5) is $2.50 per share or 100% of market value whichever is greater. In this case, the $2.50 per share is greater. Therefore 1,000 shares of MNO x $2.50 per share = $2,500.
Closed-End mortgage bond
Cannot be used as collateral for future loans
zero coupon bonds are ourchased by investors looking for...
Capital accumulation
When a corporation is investing its funds, which of the following types of securities provides the best tax incentives for the corporation? Convertible fixed income debt securities Treasury securities Corporate debt securities Corporate preferred stock
Corporate preferred stock EXPLANATION When a corporation invests in the equity securities of other corporations, the dividends from those securities are 50% excluded from taxable income. Therefore, only 50% is subject to income tax. Preferred stock provides the greatest level of income and appreciation, along with tax benefits among the choices offered.
Nominal yield
Coupon rate
What agreement is signed when a customer opens a margin account with a broker dealer?
Credit Agreement
Mark to the Market
market value of a security and the contract value of a security
Bloomberg
online platform where detalied lists of securities including new muni bonds coming to market can be found
NO INVESTMENT CARRIES ZERO RISK
NO INVESTMENT CARRIES ZERO RISK
SEC Rule 144A permits the resale of non registered securities to all of the following EXCEPT: [A] insurance companies [B] banks [C] mutual funds [D] individuals
D. Individuals EXPLANATION SEC Rule 144A permits the sale of restricted securities to Qualified Institutional Buyers (QIB's) but not individual investors.
REIT's do or do not have to be registered with the investment company act of 1940?
DO NOT
The Blue List
Daily listing of municipal bonds for sale
Debenture
Debt backed by the "good faith and credit", unsecured debts
DERP
Declaration Date Ex-Dividend Date Record Date Payable Date
Series form bonds would have...
Different issuance dates and the same maturity dates.
Series bond
Different issue dates, same maturity
Asset Allocation
Diversification of portfolio (Stocks, bonds, real estate, etc)
Western agreement
Divided account
Federal Gift tax liability for an 529 Education plan falls on the Donee or Donor?
Donor
CMOs may be collateralized by which of the following? I.Ginnie Mae II.Fannie Mae III.FHA mortgage loans IV.Conventional mortgages [A] I and II only [B] III and IV only [C] I, II, and III only [D] I, II, III and IV
EXPLANATION All items listed may be used to collateralize CMO's.
Term Bond
Entire issue of bonds that all have the same maturity dates
Pre approval for borrowing and lending to customers is not required if the person being lent to is what?
Family
When a client opens an options account at a firm, regulations dictate the firm must receive an account agreement signed by the customer within what time fram?
Followig the approval of the account, within 15 days
List three examples of a defensive stock.
Food, Tobacco, and utility companies, anhd oil.
Unfunded Liability
Future Pension payments for which sufficient funds have been set aside
GAN
Grants received by municipalities from the federal Gov
Advertising is information disseminated to the public in which the Broker/Dealer does not...
Have "control" over who sees the information
Alpha
How much a stock will react to news or events related
Which of the following are characteristics of T-Bills? I.T-Bills normally will trade at a premium to par. II.For taxation purposes, all proceeds received upon maturity that are greater than the price paid are considered capital gains. III.Several maturities are available for T-Bills including 1 year down to 4 weeks. IV.Interest rates are not "stated" on T-Bills.
III and IV EXPLANATION T-Bills have maturities of 4-weeks, 13-weeks, 26-weeks, and 1-year. There is no stated interest rate on T-Bills. T-Bills are sold at auction at a discount and the yield is determined at that time.
Does pre refunding and advancve refunding improve or worsen the quality rating of the issue?
Imrpove, both pre refunding and advance refunding improve the quality rating.
Gross settlement vs profit or loss
In gross settlement do not use the premiums, in profit or loss you do
Cost Basis of common stock and preferred stock
Includes acquisition price and all associated commissions/fees
Are T-Bills taxed as interest income or capital gain?
Interest income
Non - Qualified Annuity
Is an annuity where after-tax dollars are contributed by an individual investor buying a contract Upon retirement, only the excess over the amount contributed is taxable
Open Ended investment company (Mutual Fund)
Issue and redeem shares daily, there is a markup associated. Bid=NAV=Redemption price Ask=NAV + max sales load=Offering price Cannot be bought on margin
When a dividend is distributed in a mutual fund what happens to the NAV
It also goes down
To determine if a zero coupon bond is trading at a permium or a discount to it's accreted value you have to work from?
It's original yield
CMO tranches that pay a variable rate of interest are measured to the
LIBOR
Articles of incorporation must be retained for...
Life
Short against the box
Long a Security and Sells the same security Short - For arbitrage purposes - to hedge an anticipated decline in their long stock position (but maintain long-term investment status for tax purposes) CANNOT be used to postpone taxes
Class A shares are...
Long term. (Keep "A" girl long term)
A note with a warrant attached would have lower or higher interest rates? And will this note be more or less marketable with the warrant attached?
Lower interest rate due to the benefit of the warrant and they will be more marketable.
High P/E Ratio means
Market price going up
Beta
Measure of volatility
CMO's pay investors how frequently
Monthly
Extension risk on a CMO
Mortgage are not paid off on time and are extended, CMO may be extended
CMO Advertising
Must NOT contain comparisons AD must describe initial issue tranche
Alternative minimum Tax (AMT)
Must be paid if the amount of AMT exceeds the investors regular tax liability
Regulation S-P
Must deliver an intial privacy policy to new customers and provide an annual privacy notice annually
ROTH IRA contribtuions are pre tax
Must pay the taxes at payout of a ROTH IRA
Stock dividendsissued by the company are Cash dividends issued by the company are Taxable events?
Stock dividends are not taxable events Cash dividends are taxable events in the year received
CDO (Collateralized Debt Obligation)
Structured debt security backed by a pool of assets including mortgages, auto loans, corporate debt and credit card debt. Tranches just like CMO's
Regular way for options transactions is
T+1, Reg T is the same as always = T+4
Tender Offer
TAKEOVER attempt in which outsiders directly offer to buy the stock of the firm's shareholders
TRAN
Tax and revenue anticipation note
TAN
Tax anticipation notes
Private placements have liquidity risk due to what
The 6-month restriction on the sale of the securities purchased
Takedown
The discount from the public offering price that a member of the syndicate will receive when buying bonds from the syndicate.
Who receives an annuity contracts surrender value?
The owner of the contract NOT the beneficiary, the beneficiary is entitled to the death benefits.
Implied call risk or prepayment risk on a CMO is
The risk that the principal will be returned sooner than anticipated (Happen due to interest rate declines, increased in refinancing activites, and mortgage payoffs)
During a stock split what values of a common stock will change?
The stocks par value and market value
ADR's do or do not require SEC registration
They DO
Customers must receive a prospectus BEFORE
They can receive an application
GO bonds do or do not require voter approval
They do, revenue bonds do not
Day traders are concerned with what type of risk?
Timing risk
Negotiable CD's
Trade "plus interest" (with accrued interest) which is paid to the seller on settlement date.
Treasury STRIPS
Treasury securities that are sold in bulk to large dealers, who then strip out the coupons from principal, repackage the cash flows, and sell them separately as zero-coupon bonds;
Zero Coupon treasury bonds are also known as
U.S. Treasury receipts
Eastern Agreement
Undivided account
When could one expect changes in the NAV of a mutual fund
When the values of securities within the funds portfolio change
Are Variable Annuities Tax Deferred?
Yes
Is a negative feature of DPP's lack of liquidity?
Yes
Can there be Zero Coupon muni bonds?
Yes, both revenue and GO zero coupons
When a member firm receives a sell long order for a customer account the member must have reasonable assurance that the customer will deliver the securities within [A] 2 business days. [B] 2 calendar days. [C] 4 business days. [D] 4 calendar days.
[A] 2 business days. EXPLANATION The member must have a reasonable assurance that the customer will deliver by settlement date, which is trade date plus 2 business days for regular-way trades (T+2).
Rights are best defined by which of the following? [A] A short-term privilege to existing common stockholders to buy new shares in proportion to shares they already own. [B] The ability to receive a fixed cash dividend. [C] A long-term option to buy stock at a set price from the issuing company. [D] The ability to sell stock at a set price for set time period.
[A] A short-term privilege to existing common stockholders to buy new shares in proportion to shares they already own. EXPLANATION Rights (RTS) are a short-term privilege granted by a corporation to existing common shareholders which give them the opportunity to subscribe to a proportionate number of newly issued shares at a price that is typically lower than the public offering price before the public is allowed to purchase the new shares. Fixed cash dividends are paid on preferred stock. Warrants give investors a long-term option to buy stock from the company at a set price. Put options allow investors to sell stock at a set price for a set time period.
If a customer's cash account is frozen due to the failure to make prompt payment [A] Additional purchases (except for exempt securities) are not permitted unless sufficient funds are already in the account before the order is processed. [B] He may not make any additional purchases in the account. [C] All transactions in the account must cease. [D] It indicates that there is a deficit balance in the account.
[A] Additional purchases (except for exempt securities) are not permitted unless sufficient funds are already in the account before the order is processed. If a customer's cash account is frozen due to the failure to make prompt payment any additional purchases are not permitted unless sufficient funds are already in the account before the order is processed.(except for exempt securities)
For purposes of a Reg D offering, which of the following would NOT be considered an accredited investor? [A] An investor who frees up just under 50% of his net worth and uses it to purchase $175,000 of the offering [B] One of the issuer's executive officers [C] An investor who made $350,000 for the past 5 years [D] A husband and wife who have a $1,000,000 joint net worth
[A] An investor who frees up just under 50% of his net worth and uses it to purchase $175,000 of the offering EXPLANATION For purposes of a Reg D offering, accredited investors include: 1) Directors, executives, and general partners of the issuer 2) Individuals with a net worth of $1,000,000 or higher (joint net income of husband and wife is acceptable) 3) Individuals who have income in excess of $200,000 in each of the last 2 years and expects income of $200,000 or higher in the current year. Answer A is an individual whose net worth would be $350,000 (50% of $350,000 = $175,000).
Concerning e-mails, or electronic communications being sent to clients, all of the following are FALSE EXCEPT: [A] As long as the number of clients receiving the e-mail does not exceed 25 or more existing clients principal approval is not necessary. [B] As long as the sender of the electronic communication is properly trained, review is not necessary at anytime before such communications are sent. [C] Since e-mail is not considered a formal form of communication, no review is ever necessary. [D] All E-mails must be reviewed prior to issuance by a principal.
[A] As long as the number of clients receiving the e-mail does not exceed 25 or more existing clients principal approval is not necessary. EXPLANATION Correspondence, which includes e-mail, does not need principal approval unless it is distributed to 25 or more existing retail customers within a 30 calendar-day period and makes any financial or investment recommendation or otherwise promotes a product or service of the member.
An individual comes in and wishes to open an options account. At what time must such an account be approved? [A] Before the acceptance of the first options trade [B] Before the first options trade settlement [C] Within 15 days after the first options trade [D] Within 15 days after the Option Account Agreement is signed
[A] Before the acceptance of the first options trade EXPLANATION The Option Account Agreement must be received by the member firm within 15 days from the time that the account is approved, but the account must be approved before the first options trade.
Which of the following would be considered an INAPPROPRIATE investment in an IRA account? [A] Bonds of a municipality that carry a AAA-Rating [B] Bonds of a corporation that carry an A-Rating [C] Common stocks of blue-chip companies [D] Mutual funds focused on growth
[A] Bonds of a municipality that carry a AAA-Rating EXPLANATION In an IRA account, either the funds invested are already tax-deferred, or the distributions will be tax-free (Roth). This makes investment in tax-free securities less appealing in such an account. The municipal bonds would be the least appropriate in an IRA account.
As inflation increases over time, the best hedge against it has historically been provided by which of the following types of securities? [A] Common stocks [B] Preferred stocks [C] Government Securities (T-Bonds, etc.) [D] Convertible bonds
[A] Common stocks EXPLANATION Choices B, C, and D are fixed income instruments which are vulnerable to inflation and/or purchasing power risk. Common stock carries the greatest risk as well as the greatest reward potential. Historically, common stock has outperformed the other choices and has been the best hedge against inflation.
Which of the following could be used to meet a Reg T call on an initial transaction in a customer's margin account? I. A cash deposit equal to the amount of the call II. An escrow receipt with a value that is equal to the amount of the call III. Listed securities which have a loan value that is equal to the amount of the call IV. Listed securities which have a market value that is equal to the amount of the call [A] I & III [B] II & III [C] II & IV [D] I & IV
[A] I & III EXPLANATION If securities are to be deposited they would have to have a LOAN VALUE equal to the call. Remember that securities have a loan value of 50% of their market value. A Cash deposit equal to call would also work, but not an escrow receipt.
Reg T governs the extension of credit for which of the following: I.Listed common stock II.NASDAQ national market system OTC securities III.Government securities [A] I and II [B] I and III [C] II and III [D] I, II, and III
[A] I and II EXPLANATION III Government securities are exempt from Reg T.
Which of the following would fall under the regulation of the 5% Mark-Up Policy of the NASD? I.Outstanding securities that are not exempt and are sold OTC. II.A registered secondary offering of shares III.Open-end investment company share sales
[A] I only The 5% Mark-Up Policy does not apply when a prospectus is delivered. A prospectus would be delivered with both option II and III.
A registered rep is in the process of being hired with a new firm. The registered rep isn't sure whether it is required that he disclose a 'no contest' plea to a misdemeanor charge of petty theft which occurred over 15 years prior. Does this have to be disclosed? [A] In the process of completing form U-4, the rep will have to disclose the offense. [B] Because there was no trial for the case, the rep need not disclose the offense. [C] The rep should notify the compliance officer of the offense. [D] Since the offense occurred more than 10 years prior and was not securities-industry related, the rep need not disclose the offense.
[A] In the process of completing form U-4, the rep will have to disclose the offense. EXPLANATION Form U-4 requires disclosure if the applicant has ever been convicted or pled guilty or "no contest" to a misdemeanor involving investments or any wrongful taking of property.
All of the following are typically services provided in a prime brokerage account EXCEPT [A] Investment advice [B] Securities lending [C] Centralized trade settlement while still using multiple executing brokers [D] Calculating a total return on all investments
[A] Investment advice EXPLANATION A prime brokerage account is a bundled package of services offered by a broker-dealer to hedge funds and other institutional investors that use aggressive trading strategies. A written prime brokerage agreement is required to open a prime brokerage account. Investment advice is not typically part of the package. The other services are typically part of the package.
All of the following terms are associated with an order EXCEPT: [A] Late [B] Designated [C] Limit [D] Market
[A] Late EXPLANATION All choices relate to orders except "Late." The term "late" would relate to how the tape is reporting order executions.
The economic theory that states that the economy works best when it is left alone, free from government intervention is called: [A] The Classical Economic Theory [B] The Keynesian Economic Theory [C] The Monetarist Economic Theory [D] The Supply Side Economic Theory
[A] The Classical Economic Theory EXPLANATION The Classical Economic Theory (aka "laissez-faire" economics) believes that the economy works best when left alone, free from government intervention. It believes that the equilibrium between supply and demand determines prices best. Keynesian theory believes in government intervention in the economy viz. increased government spending will put money in the hands of consumers. Monetarist theory believes that monetary policy is more important than fiscal policy. Supply side theory believes that putting money in the hands of the producers works best for the economy. This is accomplished by reducing the size of the government and taxes.
What information MUST a telemarketer disclose to the recipient of a cold call according to the Telephone Consumer Protection Act of 1991? [A] The caller's and the firm's names and the firm's address or telephone numbers. [B] How the caller got the recipient's name and telephone number. [C] The purpose of the call [D] That the recipient is not on the caller's do-not-call list.
[A] The caller's and the firm's names and the firm's address or telephone numbers.
Market momentum refers to: [A] The degree of strength or weakness in various industry groups. [B] Disintermediation [C] Money supply [D] The impact of fiscal and monetary policies on the market
[A] The degree of strength or weakness in various industry groups. EXPLANATION Market momentum is the tendency of a security to continue movement in a single direction. Momentum is one of the most important factors in trend analysis of the stock prices. It also indicates the degree of strength or weakness for industry groups.
Which of the following is TRUE of warrants? [A] When the warrants are issued, the market price of the underlying stock would be below the exercise price. [B] They are all issued as perpetual warrants. [C] They pay dividends. [D] The market price of the stock is considerably above the exercise price when they are issued.
[A] When the warrants are issued, the market price of the underlying stock would be below the exercise price. EXPLANATION Because warrants are used as an incentive or "sweetener," the exercise price of the warrant will be more than the offering price of the new issue. As time passes and the market price of the new issue rises, the warrant will become valuable.
When could one expect changes in the net asset value of a mutual fund? [A] When there are changes in the value of securities within the fund's portfolio [B] When customers redeem fund shares [C] When customers exchange fund shares for another fund's shares within the same family [D] When shares of the fund are split
[A] When there are changes in the value of securities within the fund's portfolio
When could one expect changes in the net asset value of a mutual fund? [A] When there are changes in the value of securities within the fund's portfolio [B] When customers redeem fund shares [C] When customers exchange fund shares for another fund's shares within the same family [D] When shares of the fund are split
[A] When there are changes in the value of securities within the fund's portfolio The Net Asset Value of a fund is calculated by taking the closing market value of all securities in the portfolio plus other assets and cash, minus liabilities and dividing that number by the total number of shares outstanding, therefore the best answer offered would be "A".
The negotiated underwriting of municipal securities usually involves all of the following EXCEPT: [A] a bid form [B] a legal opinion [C] an underwriters agreement [D] a bond purchase contract
[A] a bid form EXPLANATION The bid form is used in a competitive bid underwriting rather than a negotiated underwriting. General obligation (G.O.) bonds are usually awarded by competitive bid. Revenue bonds are usually negotiated.
Each of the following items is acceptable in the advertisement of a mutual fund except? [A] an application from the fund to purchase shares [B] an explanation of investment objectives [C] information about the fund's risk level [D] the names of various distributors that offer the fund
[A] an application from the fund to purchase shares
Each of the following items is acceptable in the advertisement of a mutual fund EXCEPT [A] an application from the fund to purchase shares [B] an explanation of investment objectives [C] information about the fund's risk level [D] the names of various distributors that offer the fund
[A] an application from the fund to purchase shares Customers must receive a prospectus BEFORE they can receive and complete an application to buy shares.
Mortgage Real Estate Investment Trusts generally invest in which of the following? [A] properties handled by developer or builders [B] income producing properties [C] residential mortgage loans [D] oil and gas properties
[A] properties handled by developer or builders Mortgage Real Estate Investment Trusts lend money to builders and developers and then pass the income on to shareholders.
On the ex-dividend date, an open limit buy order is usually [A] reduced by the amount of the dividend. [B] increased by the amount of the dividend. [C] canceled. [D] not changed.
[A] reduced by the amount of the dividend. EXPLANATION Buy Limit and Sell Stop orders are reduced by the amount of the dividend on the morning of the ex-date.
A new options trading customer asks his RR how he will know what commission is being charged on option trades. The RR should advise the customer that: [A] the commission will be disclosed on the customer's trade confirmation. [B] the commission is included in the option premium paid or received on the option trade. [C] the commission will be agreed upon verbally by the RR and the customer before the trade is executed. [D] principal trades always disclose the commission to the customer
[A] the commission will be disclosed on the customer's trade confirmation EXPLANATION When a customer is charged a commission on a transaction it is always disclosed on the confirmation. If a customer is charged a mark-up or mark-down, although it is often disclosed on the confirmation it does not have to be disclosed.
Harvey had his registration revoked last year. If he wants to re-join the securities industry as a licensed person, who can approve it? [A] FINRA [B] The SEC [C] The member firm's executive committee by unanimous vote only [D] The U.S. Justice Department
[B] The SEC EXPLANATION If a registration is revoked, the individual cannot be licensed again unless approved by the SEC.
A Letter of Intent (LOI) is an agreement that is signed by [A] the purchaser of mutual fund shares indicating the intent to purchase a large quantity of shares over a short-term period of time and it offers the purchaser the ability to receive a breakpoint, or reduced sales load. [B] the purchaser of mutual fund shares indicating the intent to purchase and accumulate value in relation to mutual fund shares, potentially qualifying for reduced sales loads on future purchases. [C] a broker/dealer that intends to offer shares of a mutual fund to their customers. [D] a customer of a broker/dealer who intends to open an account at the broker/dealer firm, but does not yet have the capital available for an initial deposit.
[A] the purchaser of mutual fund shares indicating the intent to purchase a large quantity of shares over a short-term period of time and it offers the purchaser the ability to receive a breakpoint, or reduced sales load. EXPLANATION A letter of intent (LOI) is an agreement that allows for a breakpoint to be reached with the total funds invested over a specified period of time (up to 13 months). Once the total investment reaches the amount agreed upon in the LOI, the investor receives a breakpoint on all funds invested. A Rights of Accumulation would be used if an investor intended to buy and accumulate value of mutual fund shares and hoped to achieve a breakpoint in relation to this accumulated value. Broker/dealers have selling arrangements with mutual fund offerors, but would not sign a letter of intent. If a customer wishes to open an account but does not yet have the capital available to do so, the firm would just tell the customer to wait until the funds are available; there is no LOI in this context or scenario.
An investor living on a fixed income has $10,000 to invest. His investment objectives are safety of principal and capital appreciation. Which of the following would be the most suitable investment? [A] Common stock in a growth company [B] A convertible corporate bond, rated grade A or better [C] U.S. Savings bonds [D] Money market fund
[B] A convertible corporate bond, rated grade A or better EXPLANATION A convertible corporate bond graded A or better would most likely achieve the results that the investor desires. The fact that the bond is rated A or better means that it is a high quality bond with little chance of defaulting on debt service payments. The convertible feature will offer the investor the appreciation potential that he is seeking because an increase in the underlying stock will cause the market value of the bond to also increase.
Which regulator determines which securities can be purchased on margin when the securities are non-exempt securities trading on the OTC market? [A] FINRA - Financial Industry Regulatory Authority [B] FRB - Federal Reserve Board [C] SEC - Securities Exchange Commission [D] SIA - Securities Industry Association
[B] FRB - Federal Reserve Board EXPLANATION The Federal Reserve Board determines which securities can be purchase on margin when the securities are non-exempt OTC securities. Exchange traded securities are determined by the exchange on which they trade.
Which of the following may a U.S. investor use to offset taxes paid on dividend income earned from owning foreign stocks? [A] Tax-Exempt Status [B] Foreign Tax Credit [C] Tax Lien [D] Residual Value
[B] Foreign Tax Credit EXPLANATION Foreign companies and governments generally withhold a percentage of U.S. investors' dividends and interest received from foreign securities to cover foreign taxes, but they do not withhold capital gains. The customer can use the amount withheld as a foreign tax credit or an itemized deduction on their tax return.
ABC Company declared a fifty cent ($0.50) per share dividend on August 15th to shareholders of record Friday, September 15th. On which two of the following days can an ABC Company stockholder sell his shares and still receive his fifty cent ($0.50) per share dividend? I.Wednesday, September 13th for regular way settlement. II.Thursday, September 14th for regular way settlement. III.Friday, September 15th for cash settlement. IV.Monday, September 18th for cash settlement. [A] I and III [B] II and IV [C] I and IV [D] II and III
[B] II and IV EXPLANATION Usually dividend questions are asked from a buyer's point of view, - buy before ex-date to receive the dividend - but this question says the investor already owns the stock and wants to keep the dividend; when should they SELL. In this case the investor would wait until the ex-date or after before selling in order to keep the dividend. Ex-date for regular way settlement is 1 business day prior to record date - or II Sept 14. Ex-date for cash settlement is the business day after record date - or IV Sept 18. Remember you must: Buy before the ex-date or Sell on or after the ex-date to receive the dividend.
A self-employed middle-aged woman contributes annually to a Traditional IRA. She is unmarried, has two grown children, and has established a trust naming her two children as sole beneficiaries. The woman puts her assets in the trust and names the trust as beneficiary of the Traditional IRA. If she should die, what would happen to her IRA? [A] IRA assets would be divided evenly between her two children. [B] IRA assets would be included in the trust and established distributions from the trust to her children would be taxable as ordinary income. [C] IRA assets would be included in the trust, and her children would be allowed to rollover the distributions into their own IRAs on a tax-free basis. [D] The IRA would become the property of the Estate and would not be distributed to her children.
[B] IRA assets would be included in the trust and established distributions from the trust to her children would be taxable as ordinary income. EXPLANATION If a person establishes a trust and names the trust as beneficiary of their IRA, IRA assets pass to the trust upon death and distributions from that trust to beneficiaries of the trust would take place according to trust documents and would be taxable to those beneficiaries as ordinary income.
All of the following are benefits of transfer-on-death (TOD) registration EXCEPT: [A] Probate is avoided with TOD registration. [B] TOD registration helps to cut down on inheritance taxes. [C] TOD registration helps to keep control over securities in the hands of the owner. [D] Such registration is a simple manner in which a beneficiary is registered.
[B] TOD registration helps to cut down on inheritance taxes. EXPLANATION Beneficiaries of transfer-on-death registration accounts are still responsible for estate taxes on the accounts
If an elderly customer of a RR develops dementia so that he can no longer handle his own affairs and the RR becomes aware of the customer's situation, the RR can only take orders for trades in the customer's account from third party who: [A] Has a power of attorney [B] Is a court appointed guardian or conservator of the customer's property [C] Has a signed letter from the customer authorizing a third party to act for him [D] Is a close relative of the customer
[B] Is a court appointed guardian or conservator of the customer's property EXPLANATION If the customer develops dementia so that he cannot handle his affairs, a court order will be required to take orders from a third party. A power of attorney may only be signed by a person of sound mind. (However, a durable power of attorney signed at a time that the customer was of sound mind would be acceptable documentation to take orders from a third party.) A signed letter would be insufficient because the customer is not of sound mind. Also,being a close relative is insufficient absent statutory authorization.
Mr. Smith, your client, has maintained about 80% of his portfolio in fixed income securities. Interest rates are expected to decline over the next 12 month period. Mr. Smith calls you because he is concerned about this prediction and his portfolio. Which of the following recommendations would be appropriate for you to give to Mr. Smith? [A] Move 50% of his portfolio into equity securities [B] Leave his portfolio the way it is now [C] Move 60% of his portfolio into Money Market funds [D] Move 25% of his portfolio into Limited Partnerships
[B] Leave his portfolio the way it is now Of the choices offered the best choice would be to leave his portfolio in fixed income securities. If interest rates decline the value of his bonds will go up and his overall portfolio value will increase. He also would be able to continue to receive the income from the coupons on the bonds he currently owns.
Mrs. Smith set up a Uniform Gifts to Minors Account for her daughter and the custodial account has done very well this past year. The profits and earnings on this account would be reportable on which person's tax return? [A] Mrs. Smith's [B] Mrs. Smith's daughter [C] Mr. Smith [D] Mr. and Mrs. Smith's joint tax return
[B] Mrs. Smith's daughter EXPLANATION In a UGMA/UTMA account the child's social security number is used and the profits and earnings on the account will be filed on the tax return of the minor. These profits and returns are NOT filed on the donor's or custodian's return.
All of the following statements on the secondary market of Brokered CDs are INCORRECT EXCEPT: [A] An interest penalty is added to the par value of the Brokered CD when it is returned to the investor. [B] On settlement date, accrued interest is added to the market value of the Brokered CD and the seller receives both. [C] No interest is added to the par value when the Brokered CD is returned to the seller. [D] On settlement date, the accrued interest penalty is subtracted from the market value of the Brokered CD and then paid to the seller.
[B] On settlement date, accrued interest is added to the market value of the Brokered CD and the seller receives both. EXPLANATION When Brokered CDs are sold in the secondary market, they trade at the market value of the brokered CD plus accrued interest. This is paid to the seller by the buyer on settlement date.
All of the following are advantages of opening and registering an account as a "Transfer on Death" (TOD) except: [A] The owner maintains control over the account until their death [B] Once a beneficiary is designated, the designation is irrevocable [C] The owner reserves the right to change the beneficiary [D] Transfer of the account at death avoids probate
[B] Once a beneficiary is designated, the designation is irrevocable EXPLANATION A Transfer on Death account is in the owner's name but upon death the assets in the account go directly to the designated beneficiary, thus avoiding probate.
Which of the following indicates if the yield of a zero-coupon bond is currently trading at a premium or at a discount to its compound accreted value? [A] Original dollar price [B] Original yield [C] Maturity date [D] Dated date
[B] Original yield EXPLANATION To determine if a zero coupon bond is trading at a premium or discount to its accreted value you would always have to work from its original yield.
The Employee Retirement Income Security Act of 1974 (ERISA) covers which of the following? [A] Retirement accounts of public sector employees. [B] Retirement accounts of private sector employees. [C] Retirement accounts of public and private sector employees. [D] Retirement accounts of municipal employees only.
[B] Retirement accounts of private sector employees. EXPLANATION ERISA covers Retirement Plans of private sector employees. Its primary purpose is to protect employees from the mishandling of retirement funds.
Which of the following would NOT be a reason for a municipality to issue revenue bonds versus general obligation bonds? [A] Current legislation at the state level requires the self-sufficiency of projects of this nature. [B] Statutory debt limitations are usually enforced on revenue bonds. [C] User fees are expected to support the project once completed. [D] Only certain members of the community will use the project.
[B] Statutory debt limitations are usually enforced on revenue bonds. Revenue bonds are NOT subject to statutory debt limits
One of the analysts at your firm likes to focus their analysis on comparing the total amount of securities that are appreciating in market value to the total amount of securities that are depreciating in market value. What method is this analyst using? [A] The analyst is using the Upward Volume-to-Downward Volume theory. [B] The analyst is using the Advance-Decline theory. [C] The analyst is using the Dow Jones Industrial Averaging Technique. [D] The analyst is using the Equity Consumer Indexing Technique.
[B] The analyst is using the Advance-Decline theory. EXPLANATION The theory or technique being used is the advance-decline theory, which compares the total number of securities which have risen in market value to the total number of securities which have decreased in market value.
Of the following choices, which is the BEST description of a municipal revenue bond's "indenture"? [A] The bond indenture is an overview of the value of the bond over the life of the bond at various intervals. [B] The bond indenture is a contractual obligation between the trustee and issuer and it includes details on necessary reserve funds and required rate schedules for the bond. [C] The bond indenture ensures that the bond is legally binding and valid. [D] The bond indenture is a summary of the feasibility study performed on prospective projects.
[B] The bond indenture is a contractual obligation between the trustee and issuer and it includes details on necessary reserve funds and required rate schedules for the bond. EXPLANATION A municipal revenue bonds indenture is best described as the contract between the issuer and the trustee and will include the rate schedules and reserve fund requirements.
Broker-dealers charge their margin customers interest on the debit balances held in the customers' margin accounts. What is the interest rate called that is the basis for margin rates charged to customers? [A] The current federal funds rate [B] The current broker call rate [C] The discount rate established by the FED [D] The going prime rate found in the open market
[B] The current broker call rate EXPLANATION The rate that margin customers pay on debit balances in their margin accounts is based on the broker call rate.
The term "capital risk" is best described by which of the following statements? [A] The customer will incur a loss if securities are purchased at the wrong time. [B] The full amount originally invested may not be received by the customer upon disposition of the security. [C] When the investment is liquidated, purchasing power may be less than that when the money was originally invested. [D] It is the amount of regular income received from an investment which may or may not be the amount that was originally expected.
[B] The full amount originally invested may not be received by the customer upon disposition of the security. EXPLANATION Capital Risk refers to the risk of losing the principal invested.
Which of the following can be said if an individual or institutional investor is engaging in frequent trading activity in mutual funds? [A] The investor is likely hedging other investments. [B] The investor is using market timing to attempt to maximize results. [C] The investor is front-running ahead of upcoming larger trades. [D] The investor is leveraging his accounts.
[B] The investor is using market timing to attempt to maximize results. EXPLANATION Market timers attempt to maximize results by trading frequently in and out of investments. Mutual funds are designed for long-term investment. Short-term, rapid, in-and-out trading by investors, especially large investors, can adversely affect long-term investment results for ordinary shareholders. This practice may be illegal when engaged in by member firms or their registered representatives. Hedging is an investment strategy to attempt to reduce or eliminate risk. Leveraging refers to increasing the investment rate of return by investing borrowed funds. Front-running is trading on advance knowledge of non public information.
Which would be a Non-cyclical/Defensive industry? [A] The computer software industry [B] The pharmaceutical industry [C] The gold mining industry [D] The automobile industry
[B] The pharmaceutical industry Industries with items that people always need
On Tuesday, February 11th, one of your clients calls in and is curious about a stock that they purchased the previous business day of Monday, February 10th. The stock was purchased regular way and the client wants to know when the transaction will settle. What is the anticipated settlement date for this trade? [A] The stock will settle T+4, so settlement should be expected no later than Friday, February 14th. [B] The stock will settle T+2, so settlement should be expected no later than Wednesday, February 12th. [C] The stock will settle T+1, so settlement should take place no later than the end of the business day on which the client called, Tuesday, February 11th. [D] The stock should have settled same day, on Monday, February 10th.
[B] The stock will settle T+2, so settlement should be expected no later than Wednesday, February 12th. EXPLANATION Regular way settlement is T+2. If the trade date was Monday, February 10th, then the settlement date will be Wednesday, February 12th. If the stock were settled "Reg T", then the T+4 deadline of Friday, February 14th would be used. "Cash" settlement takes place on the same day as trade date.
Paul and Mary Smith own a small candy shop. Both Paul and Mary have established traditional IRA's, contribute to them annually to provide for their retirement and have designated each other as beneficiary to their accounts. Paul and Mary have two grown children. If either Paul or Mary should die, what would happen to their IRA? [A] The surviving spouse would receive the distribution as ordinary income in the year their spouse died. [B] The surviving spouse would become the owner of the IRA and have the title to the account changed to the surviving spouses name. [C] The IRA would become part of the deceased persons estate and assets would be distributed according to the Will of the deceased person. [D] The assets of the IRA would be split equally and taken as ordinary income between the surviving spouse and the two children.
[B] The surviving spouse would become the owner of the IRA and have the title to the account changed to the surviving spouses name.
Of the following statements which are true about market orders made "at the opening"? [A] Their priority is at parity with limit orders on the book. [B] Their priority is above limit orders on the book. [C] They are subordinate to limit orders. [D] "At the opening" orders cannot be used for market orders.
[B] Their priority is above limit orders on the book. EXPLANATION Market orders at the opening always have precedence over limit orders on the NYSE.
Which of the following would contain the conditions and agreements of an upcoming issue of bonds by a corporation? [A] These would be contained in the Tombstone Ads produced for the bonds. [B] These would be contained in the bond's indenture. [C] These would be contained in the underwriter's agreement. [D] These would be contained in the legal opinion of the bond.
[B] These would be contained in the bond's indenture.
An investor at the firm insists on buying a stock in order to receive the dividend, despite being advised against this by their registered representative. The stock's record date is Monday, October 23rd. Assuming a regular-way settlement, the latest that this investor could buy the stock and still receive the dividend is [A] Wednesday, October 18th. [B] Thursday, October 19th. [C] Friday, October 20th. [D] Saturday, October 21st.
[B] Thursday, October 19th. EXPLANATION In order to receive the dividend, the investor would have to buy the stock prior to the ex-date in order to receive the dividend. The ex-date in this scenario is Friday, October 20th, which is one business day prior to the record date. Therefore, the investor would need to purchase this stock on or prior to Thursday, October 19th, in order to receive the dividend.
When an investor is deciding whether to buy puts or sell the stock short, buying the puts offers all of the following advantages EXCEPT? [A] The same or greater profit potential versus selling the stock short [B] Time value dissipates [C] Smaller capital required [D] Limited loss potential
[B] Time value dissipates EXPLANATION Advantages to buying puts over selling the stock short include the fact that there is a smaller capital commitment but the same or greater profit potential. Your only risk is the premium paid to buy the option and therefore the premium is your maximum loss potential. The fact that Time value decreases is a true fact but it would NOT be considered to be an advantage.
An emerging growth company is generally defined as a company: [A] With total annual gross revenue of more than $1 billion for its most recent fiscal year [B] With total annual gross revenue of less than $1 billion for its most recent fiscal year [C] With total annual gross profits of less than $1 billion for its most recent fiscal year [D] None of the above
[B] With total annual gross revenue of less than $1 billion for its most recent fiscal year EXPLANATION The definition in choice B is the generally accepted definition of an emerging growth company. It is usually a young company in a fast growing industry. These kinds of companies are usually characterized by high risk, high return, and high failure rates.
You believe that the Federal Reserve Board will raise interest rates over the next few months and inflation has been slowly going up. Based on these facts which of the following investment choices would be the LEAST appealing? [A] a bond portfolio with varied maturities [B] a mutual fund that consists of long term U.S. Government Bonds [C] Treasury Bills [D] Money Market fund
[B] a mutual fund that consists of long term U.S. Government Bonds EXPLANATION Of the choices offered the LEAST attractive would be the mutual fund that consists of long term U.S. Government bonds. When you expect interest rates to go up soon you should invest in securities with short-term maturities, let the rates go up and then be able to reinvest at a higher rate.
An investor is considered "uncovered" in which of the following scenarios involving option contracts? The investor: [A] buys 1 XYZ Call option with no other stock positions [B] buys 100 shares of ABC common stock and sells 1 ABC put option [C] buys 100 shares of XYZ common stock and sells 1 XYZ call option [D] buys 1 ABC put option with no other stock positions
[B] buys 100 shares of ABC common stock and sells 1 ABC put option EXPLANATION Long stock positions do not cover a short put contract. The most common way that the seller of a put contract is covered is by having funds on hand in their account that are equal to the total exercise value of the contract in the event that the seller of the put receives an exercise notice. Buyers of options are not considered "covered" or "uncovered", because the buyer decides whether or not the option is exercised. If an investor owns 100 shares of a stock and sells a call against that stock, the investor is considered covered. Selling a call by itself with no stock position would be considered "uncovered" (not listed as an answer choice).
Predictions about the future performance of mutual funds and variable annuities are [A] permitted if the basis of the prediction is provided. [B] not permitted, regardless of the situation. [C] permitted if prepared by an outside and unbiased analyst. [D] not permitted unless reviewed by FINRA 10 days before first use.
[B] not permitted, regardless of the situation
If an investor spreads his mutual fund investments over several different fund families, his/her registered representative should disclose to the investor that the investor will probably forfeit which of the following privileges? [A] exchange privileges [B] sales charge breakpoint [C] systematic withdrawal program [D] automatic reinvestments of dividends and distributions
[B] sales charge breakpoint
If a long call option is exercised by the holder, the holding period on the acquired securities begins: [A] on the date the call is exercised [B] the day after the option is exercised [C] the day the call option was acquired [D] the day after the call option was acquired
[B] the day after the option is exercised EXPLANATION The holding period on stock purchased by exercising a call begins on the day after the call is exercised.
A day trader of blue chip common stocks would be most concerned with which of the following risks? [A] purchasing power risk [B] timing risk [C] default risk [D] interest rate risk
[B] timing risk EXPLANATION Generally day traders are most concerned with timing.
When an individual passes a licensing examination required by FINRA, that individual will then be required to complete the Regulatory Element of Continuing Education [A] within 1 year of initial registration and every year thereafter. [B] within 2 years of initial registration and every 3 years thereafter. [C] within 3 years of initial registration and every 3 years thereafter. [D] within 4 years of initial registration and every 4 years thereafter.
[B] within 2 years of initial registration and every 3 years thereafter. Registered Persons must complete the Regulatory Element of their Continuing Education requirement within 120 days after the anniversary of either: - The second anniversary date of their initial registration and - Every three years thereafter as long as the person remains registered
Which of the following is NOT a function performed by the designated market maker of a stock? [A] Each day, the designated market maker opens the market in their respective security. [B] The designated market maker ensures that a fair and orderly market exists and is maintained in their respective security. [C] "Not-Held" orders are taken and processed by the designated market maker. [D] The "designated market maker's book" is updated and maintained by the designated market maker.
[C] "Not-Held" orders are taken and processed by the designated market maker. EXPLANATION "Not-Held" orders are handled by "floor brokers," not by the designated market maker. All of the other functions and duties are those of a designated market maker.
The owner of a non-qualified variable annuity contract has invested $100,000 in the contract. The contract is now worth $115,000. The owner elects an annuity payout option. What is the dollar amount of the contract owner's cost basis? [A] Zero [B] $15,000 [C] $100,000 [D] $115,000
[C] $100,000 EXPLANATION The initial investment in the contract is the contract owner's cost basis.
A basis point on a BOND is [A] 1% [B] 10% [C] .01% [D] .001%
[C] .01% EXPLANATION Since a basis point is equal to 10 cents, and is a percentage of par of $1,000, it is stated as .01%
A customer puts in an immediate or cancel order to buy 100 ABC Sept 50 calls. At the same time that the order reaches the floor, a market order also arrives to sell 50 ABC Sept 50 calls. There are no other sell orders on the book. What will happen? [A] The entire 100 call order will go into the book. [B] The entire 100 call order will be cancelled. [C] 50 of the calls will be filled and the remainder will be cancelled. [D] 50 of the calls will be filled and the remainder will go into the book.
[C] 50 of the calls will be filled and the remainder will be cancelled. EXPLANATION An immediate or cancel order requires that all or part of the order be executed as soon as the broker enters a bid or offers. The portion not executed is automatically cancelled.
If securities are not delivered in the designated time period for settlement in relation to a sale, which of the following is TRUE? [A] A sell-out must occur. [B] The member firm where the sale originated will immediately have their registration suspended. [C] A buy-in must occur. [D] The member firm where the sale originated must cancel the trade and compensate the other party to the trade for any losses related.
[C] A buy-in must occur. EXPLANATION When a sale occurs and the securities are not delivered in the designated time period for settlement, a buy-in will occur. This buy-in requires the purchase of securities of like kind and quantity in relation to the unsettled trade.
Which of the following is generally considered to be a defensive stock? [A] Companies whose shares trade on the NYSE only [B] Foreign companies that sell predominantly to U.S. consumers [C] Consumer goods and food production companies [D] Companies with defense contracts with the U.S. Government
[C] Consumer goods and food production companies EXPLANATION Defensive stock tends to have stable values even in a recession. Defensive stocks include food, tobacco and oil companies as well as public utilities.
All of the following are characteristics of 401(k) plans EXCEPT [A] Voluntary employee contributions [B] Voluntary employer contributions unless the employer has committed to matching contributions. [C] A profit sharing contribution formula may not be included in the plan [D] The plan may be designed as a Roth 401(k( plan
[C] A profit sharing contribution formula may not be included in the plan EXPLANATION A 401(k) defined contribution plan is a qualified retirement plan that allows a worker to defer the receipt of a part of his/her current compensation and contribute it into a personal retirement account inside the plan. These plans are sometimes called CODA plans - cash or deferred plans. The contributions by the employees are voluntary. Contributions by the sponsoring employer are also voluntary unless the employer has committed to matching contributions. The plan may be designed with a profit sharing contribution formula or as a Roth 401(k) plan.
A municipal bond has a provision for redeeming a certain number of bonds at par in ten semi-annual installments. This type of call feature is best described as: [A] An installment call [B] An optional call [C] A sinking call [D] A catastrophic call
[C] A sinking call
All of the following positions would provide a hedge against a decline in the market value of a common stock portfolio EXCEPT? [A] Buying Put options [B] Selling short against the box [C] Buying Call options [D] Selling covered call options
[C] Buying Call options EXPLANATION Buying Calls would NOT provide downside protection but all of the other positions would provide downside protection.
One of your clients is a recently-retired individual who relies heavily upon the current return on his fixed-income portfolio for living expenses, vacations, and other expenditures. Which of the following investments is LEAST suitable for this individual? [A] US Treasury Bonds with varying maturities through the end of the client's time horizon [B] Non-callable, non-convertible bonds issued by a blue-chip company with maturities ranging to the end of the client's time horizon. [C] Callable, non-convertible bonds issued by a blue-chip company with maturities ranging to the end of the client's time horizon, but call dates as early as this year. [D] A balanced portfolio of non-callable, convertible bonds issued by blue-chip companies with maturities to the end of the client's time horizon and preferred stocks from the same issuers.
[C] Callable, non-convertible bonds issued by a blue-chip company with maturities ranging to the end of the client's time horizon, but call dates as early as this year. EXPLANATION Due to the client's reliance on the current return of their portfolio, the LEAST suitable choice would be the callable, non-convertible bonds with call dates as early as this year. Each of the other selections would provide stable income through the end of the client's time horizon.
An Open-end Mortgage Bond issued by a corporation is one in which the property used to secure the bonds: [A] Cannot be used to secure a later loan unless the later loan is lesser in claim. [B] Can be used to secure additional debt as long as the additional bonds are subordinated. [C] Can be used to secure additional bonds and all bonds rank equally. [D] Can be used to secure additional debt and in the event of bankruptcy bonds would be repaid by earliest maturities first.
[C] Can be used to secure additional bonds and all bonds rank equally. EXPLANATION An Open-end Mortgage Bond issued by a corporation is one in which the property used to secure the bonds can be used to secure additional bonds and all bonds rank equally.
A broker should disclose all of the following characteristics of a Section 529 Prepaid Tuition Plan to clients who are the parents of a college bound child and who are trying to make advance provision for the costs of college EXCEPT: [A] These plans do not have investment risk [B] These plans do provide a hedge against increases in tuition costs [C] Contributions to these plans are tax deductible for federal income tax purposes. [D] These plans typically charge enrollment and administrative fees
[C] Contributions to these plans are tax deductible for federal income tax purposes. Contributions to Section 529 Plans are not tax deductible for federal income tax purposes. All of the other question choices are correct and should be disclosed to the clients.
The intent of ERISA (Employee Retirement Income Security Act) is to protect the funds within an employee retirement fund from which of the following? [A] ERISA is designed to protect retirement funds from poor management by investment advisory firms and investment adviser representatives. [B] ERISA is designed to protect retirement funds from fraudulent activity which may take place at an executing broker/dealer's place of business. [C] ERISA is designed to protect retirement funds from poor management by an employer who handles the company retirement policy. [D] ERISA is designed to protect retirement funds from predatory taxation policies of the federal government.
[C] ERISA is designed to protect retirement funds from poor management by an employer who handles the company retirement policy. EXPLANATION ERISA was designed and put in place to protect the retirement funds of employees from poor management by employers. It places limitations and establishes guidelines associated with how funds can be invested and used within the retirement plan.
Under official interpretations of the FINRA rule on Best Execution, a member broker-dealer must do all of the following in exercising reasonable diligence in finding the best market and execution for a customer's order EXCEPT: [A] Use a broker's broker, when the member does not have direct access to a market [B] Use particular diligence when pricing information is limited [C] Follow prescribed procedures for all orders unless the order is to be executed for a foreign security not traded in the U.S. [D] Regularly review its procedures for insuring best execution
[C] Follow prescribed procedures for all orders unless the order is to be executed for a foreign security not traded in the U.S. EXPLANATION The FINRA Rule on Best Execution (Rule 2320) must be followed even when the order is for a foreign security not traded in the U.S. The other choices in this question are official interpretations of the rule.
Minor declines over at least two consecutive quarters in which of the options below would be considered a recession? [A] DJIA - Dow Jones Industrial Average [B] NASDAQ 100 [C] Gross Domestic Product [D] Cost of Living Index
[C] Gross Domestic Product EXPLANATION Recession is measured by changes in the GDP - Gross Domestic Product. Generally a recession is signified by declines in GDP over the course of at least two consecutive quarters
A market maker may: I.Take a long or short position at any time. No up-tick rule or Federal regulation applies. II.Sell from his own inventory, which may be either long or short. III.Act as both agent and principal in the same transaction. IV.Quote a work out market, a range within which the dealer feels he can obtain the security within a reasonable time period. [A] I and II [B] I, II, and III [C] I, II, and IV [D] II, III, and IV
[C] I, II, and IV EXPLANATION A market maker may perform all actions except III. Market makers may act as broker OR as dealer on a transaction but never as both on the same transaction.
Which of the following transactions must abide by the FINRA 5% Markup Policy? I.Primary offerings of securities II.Mutual fund shares III.A dealer buying securities traded OTC from one of their clients IV.A riskless transaction
[C] III and IV only EXPLANATION The FINRA 5% Markup Policy is a guideline for spreads in dealer transactions and commissions in brokerage transactions, including purchasing OTC securities from a client and riskless transactions. It does not apply to any transaction were the public offering price is pre-determined and that requires that a prospectus be delivered to buyers (e.g.. new issues & mutual fund shares.)
Regarding FINRA rules, if an RR will be paid to find investors for a limited partnership that he is affiliated with, which of the following is TRUE? [A] The member firm must contact the limited partnership to notify it that the RR is employed by the member firm. [B] No action is needed unless the RR is a limited partner. [C] If the member firm approves of this activity it must record it and supervise it. [D] If approved, FINRA has 10 business days to review the activity.
[C] If the member firm approves of this activity it must record it and supervise it. EXPLANATION RRs must inform their member firms of any "private securities transactions" done away from the business activity of the broker-dealer before engaging in such activity. If the member approves such activity, it must maintains records and supervise such activity.
Which of the following would be the basis of the calculation of earnings per share when reported on a fully diluted basis? [A] In this situation, the EPS calculation will be based on the number of shares outstanding. [B] In this situation, the EPS calculation will be based on the number of outstanding common shares minus shares that were issued throughout the year. [C] In this situation, the EPS calculation will be based on the number of outstanding common shares with additions for dilution due to convertibles, including bonds, preferred stocks, and warrants. [D] In this situation, the EPS calculation will be based on the cost of operations along with other expenses.
[C] In this situation, the EPS calculation will be based on the number of outstanding common shares with additions for dilution due to convertibles, including bonds, preferred stocks, and warrants. EXPLANATION When EPS is reported on a fully diluted basis, the firm would base the calculation on the common shares outstanding and add the possible dilution that could occur from various convertible and exercisable securities such as convertible bonds, convertible debentures, subscription rights, and warrants.
A customer who trades securities actively and aggressively is least susceptible to which of the following risks? [A] Market risk. [B] Timing risk. [C] Inflationary risk. [D] Default risk.
[C] Inflationary risk. EXPLANATION Active and aggressive trading usually lessens susceptibility to inflationary risk because customers do not lock themselves into long-term bonds and other investments that tie up their money for long periods of time. These are the securities most susceptible to inflationary (long term) risk.
Several years ago and just prior to retirement, Mr. Smith purchased 500 shares of ABC. At the time of purchase, ABC was trading at $45 per share. The price increased over the past few years and was at $60 per share when the RR for Mr. Smith's account learned that Mr. Smith had passed away in an automobile accident. Mr. Smith's will indicated that the shares should be handed over to Mr. Smith's adult daughter, Jane. This took place promptly after Mr. Smith's death and Jane decided to sell the shares several months later when the price had appreciated again to $65 per share. For taxation purposes, what is Jane's cost basis on these shares? [A] Since Jane did not pay for the shares, there is no cost basis for her at the time of the sale. [B] Jane's cost basis would be the same as her father's, $45 per share. [C] Jane's cost basis would be the price at the time the shares were transferred, $60 per share. [D] Jane's cost basis would be the price at the time of sale, $65 per share.
[C] Jane's cost basis would be the price at the time the shares were transferred, $60 per share. EXPLANATION When shares of stock are inherited through a will, the cost basis to the beneficiary is the price at which the shares were transferred from the deceased. In this case, the shares were transferred at $60 per share, leaving Jane's cost basis at that price.
What type of order would an investor enter if they wanted to buy 1 ABC May 50 Call when the premium for the option declined from its current value? [A] Buy at the opening [B] Debit Spread [C] Limit order to buy [D] Market order
[C] Limit order to buy Of the choices offered the best choice would be the limit order. The client could enter an order to buy at a set price below the current premium value and when the market reaches or falls below the specified price the order would be executed.
When determining position limits an investor that is short XYZ calls would be affected by which of the following? [A] Short XYZ puts [B] Long XYZ calls [C] Long XYZ puts [D] Long XYZ shares
[C] Long XYZ puts The position limits apply to options which are on the "same side of the market". Short calls are on the same side of the market as long puts.
An investor interested in obtaining an Official Statement for a particular state's 529 Plan would contact which of the following? [A] SEC - Securities Exchange Commission [B] FINRA - Financial Industry Regulatory Authority [C] MSIL - Municipal Securities Information Library [D] Governor of the State
[C] MSIL - Municipal Securities Information Library EXPLANATION Official Statements for a state's 529 Plan must be filed with the Municipal Securities Information Library (MSIL) and are available to the public.
A registered representative gets an order from a husband to trade in his wife's account. The registered representative: [A] May accept the order with the wife's verbal authorization [B] May accept the order if it is consistent with the wife's investment objectives [C] May not accept the order without the wife's written authorization [D] May not accept the order under any circumstances
[C] May not accept the order without the wife's written authorization EXPLANATION A registered representative may not accept an order from a husband to trade in his wife's account unless the RR has received written authorization from the wife.
You are analyzing your company in order to ensure that the retirement plans of its employees best benefit both the employees and the company. You notice that two of your executives are currently 57 and 60. Of the following choices, which best fulfills your concerns about the benefits working for both employee and employer? [A] Offering the two executives a deferred compensation plan that is non-qualified. [B] Offering the two executives a 403(b) plan. [C] Offering the two executives a defined benefit plan. [D] Offering the two executives a tax-sheltered annuity.
[C] Offering the two executives a defined benefit plan. EXPLANATION The defined benefit plan would best suit both the company and the two executives that are likely to retire in the upcoming years. Older, long-service employees will have already accumulated the highest monthly pension benefits under a defined benefit plan. Be sure to differentiate between a defined benefit plan and a defined contribution plan. The formula for a defined benefit plan defines the monthly pension that the retiree will receive. The formula for a defined contribution plan defines how much the employer must contribute to the plan annually.
If interest rates in the economy change, which of the following is least likely to change? [A] Federal Funds rate [B] Discount rate [C] Passbook rate [D] Prime rate
[C] Passbook rate EXPLANATION The passbook rate (the rate for savings accounts) is the interest rate least sensitive to fluctuation. Conversely, the Federal Funds Rate is the most sensitive.
A branch office manager has instructed office personnel to clean out several storage closets and get rid of old customer documentation that no longer needs to be retained. Which of the following is TRUE regarding record retention for customer information? [A] Broker/dealer firms are required to keep customer records for the opening of all accounts, both existing and closed, until the broker/dealer firm no longer exists. [B] Records related to opening of accounts must be retained for 6 years from the date that the account was opened. [C] Records related to opening of accounts must be retained for 6 years beyond the date that the account was closed. [D] Broker/dealer firms are required to keep all customer records for 3 years, after which records may be disposed.
[C] Records related to opening of accounts must be retained for 6 years beyond the date that the account was closed. EXPLANATION Broker/dealer firms must retain information related to the opening of a customer account for 6 years beyond when the account is closed at the firm. After that time, proper disposal is permitted. This time period is not 3 years or 6 years from the time the account is opened. Broker/dealers are not required to keep records until the firm no longer exists.
Mutual funds must send financial reports to their shareholders at least [A] with each trade confirmation which contains a link to the reports [B] Upon request by the customer [C] Semi-annually [D] Annually
[C] Semi-annually EXPLANATION Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 require funds to send financial reports to shareholders at least semi-annually (once every six months).
Which of the following entities provides a physical and electronic location where listed options transactions are performed during trading hours in the U.S.? [A] The Options Clearing Corporation (OCC) [B] The Securities and Exchange Commission (SEC) [C] The Chicago Board Options Exchange (CBOE) [D] The Financial Industry Regulatory Authority (FINRA)
[C] The Chicago Board Options Exchange (CBOE) EXPLANATION The Chicago Board Options Exchange (CBOE) is the largest U.S. options exchange facilitating the majority of listed option transactions during trading hours in the U.S. The Options Clearing Corporation (OCC) is responsible for accepting, guaranteeing, and clearing the exercise of listed option contracts and the majority of option activity in the U.S. The Securities Exchange Commission (SEC) is a regulatory commission for financial purposes in the U.S., while the Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization charged with the majority of regulatory duties within the U.S.
In which of the following scenarios would it be UNACCEPTABLE for a FINRA member firm to hold a customer's mail? [A] The customer is leaving the United States on business and the trip will be shorter than 3 months. [B] The customer provides a written request to the member firm to forward mail to a previously unknown address. [C] The customer asks the member firm to hold his mail until further notice from the customer. [D] The customer notifies the member firm that he will be on vacation for over a month.
[C] The customer asks the member firm to hold his mail until further notice from the customer. EXPLANATION Firms may not hold customer's mail indefinitely. The customer must tell the member firm how long the mail must be held. All of the other situations are acceptable concerning holding customer mail.
Which would be a counter- cyclical industry? [A] The computer software industry [B] The pharmaceutical industry [C] The gold mining industry [D] The automobile industry
[C] The gold mining industry Move in opposite direction of the econcomy
MSRB Rules dictate that certain aspects of a trade may be modified with the agreement of both parties, while other aspects of a trade may not be modified. Which of the following is NOT permitted to be modified, even if all persons involved in the trade agree? [A] Determination of who will pay expenses related to shipping certificates, etc. [B] The various factors which will determine whether or not the delivery of the securities constituted a "good delivery" [C] The information which is provided on confirmations sent to both sides of the trade [D] Determination as to where and when the securities will be delivered
[C] The information which is provided on confirmations sent to both sides of the trade EXPLANATION As long as both buyer and seller agree to modified terms, the factors associated with good delivery may be modified. These can include terms, location of delivery, time of delivery, and who pays for shipping. Confirmations are required to be uniform throughout the industry and the information contained on a confirmation is not permitted to be modified.
Which of the following regarding a customer margin account is FALSE? [A] Securities can be hypothecated. [B] Interest is charged on the debit balance. [C] The loan consent agreement must be signed by the customer. [D] The customer must sign the margin agreement.
[C] The loan consent agreement must be signed by the customer. EXPLANATION The loan consent agreement gives specific permission to broker-dealers to lend customer's securities. Customers are not required to sign the loan consent agreement.
When disclosing information to a client with regard to Class B shares, which of the following is true? [A] A commission will be paid with each purchase. [B] They are "no load" shares. [C] There is the potential of a deferred sales charge. [D] A sales charge will be imposed with the initial purchase.
[C] There is the potential of a deferred sales charge. EXPLANATION Class B shares are back-end loaded shares (deferred sales load), therefore, the potential of that charge must be disclosed to customers at the time of purchase.
A client wants a large sum of money invested for 6-8 months before he retires. Upon retirement, he will decide how he wants to reallocate his money. For the time being, all of the following would be appropriate investments EXCEPT [A] a municipal money market mutual fund [B] Treasury Bills [C] an immediate annuity which charges a single premium [D] a mutual fund designed for short-term investments and charges no sales load
[C] an immediate annuity which charges a single premium EXPLANATION Because annuities are supposed to be a long-term investment and penalties could be imposed if the annuity is surrendered, the annuity would be the least appropriate short-term investment choice.
The Statement of Additional Information must be delivered [A] within 10 days of opening a new customer account [B] when the prospectus is sent to clients or prospective clients [C] at the request of a client or prospective client [D] at least once a year to each client
[C] at the request of a client or prospective client EXPLANATION Statements of Additional Information must be delivered upon request to ANY investor, prospective or existing, who requests it.
Interest rate movements may affect all of the following regarding CMOs EXCEPT [A] rate of payments. [B] price. [C] credit rating. [D] rate of return.
[C] credit rating.
All of the following are benefits of investing in a REIT EXCEPT: [A] income and/or growth [B] professional management [C] depreciation write-offs [D] diversification
[C] depreciation write-offs A Real Estate Investment Trust (REITs) manages a portfolio of real estate to earn profits for its investors. They are like investment companies in that they provide professional management and diversification. Because REITs must distribute at least 90% of its net earnings to avoid taxation, they tend to pay high yields of 5% to 10% or more. Unlike real estate limited partnerships depreciation write offs do not pass through to the investors.
An individual receives her paycheck and pays for her rent and groceries for the month. After all the essential needs are paid for the remaining income is called [A] disposable income [B] gross income [C] discretionary income [D] residual income
[C] discretionary income [EXPLANATION An individual's income from employment before taxes are removed is known as their gross income. Taxable income refers to total income less qualified, tax-deferred contributions to retirement plans, etc.. After taxes are removed, this is referred to as the individual's net income. Net income is also known as disposable income, which can be spent on essentials, non-essentials, or it can be saved or invested. Discretionary income refers to money which can be spent after essentials are paid. It is a major economic indicator.
A customer's only account at a broker-dealer is an established margin account. The customer wishes to participate in the distribution of a new issue of common stock coming to market in the next few days. Which of the following is true regarding this situation? The customer must be told that [A] he will be required to open a cash account in order to participate in the new issue. [B] new issue purchases are not allowed in a margin account. [C] he can purchase the new issue shares in his margin account but would be required to pay for the purchase in full since it is an IPO. [D] new issues require a margin deposit of 75%.
[C] he can purchase the new issue shares in his margin account but would be required to pay for the purchase in full since it is an IPO. EXPLANATION This investor would be allowed to purchase the new issue shares in his margin account but since it is a new issue, the purchase is not permitted using margin borrowing and the customer will be required to pay for the purchase in full.
Mrs. Jones calls and wants to place an order in her husband's account because he is out of town and cannot make the call himself. The registered representative could accept the order [A] under no circumstances [B] without restriction since the couple are married [C] only if a trading authorization was signed by Mr. Jones [D] only if Mrs. Jones signs a letter of authorization
[C] only if a trading authorization was signed by Mr. Jones EXPLANATION Mrs. Jones could only enter orders in her husband's account if Mr. Jones signed a trading authorization allowing her to trade in his account.
The terms "bid" and "ask" are used to indicate [A] last sale information [B] initial public offering price [C] quotations on securities in the secondary market [D] the range within which securities are trading for that day
[C] quotations on securities in the secondary market EXPLANATION Quotations will typically contain the bid price and ask price for a security trading in the secondary market. Last sale information applies to the price at which the last trade took place. During an initial public offering, there is a fixed offering price for primary shares. Bid and ask do not apply to the range of trading for a day.
Under the SEC's Pay-to-Play Rules, a "Covered Member" is BEST described as a person or firm that [A] is not included in the rules. [B] has previously made political contributions. [C] solicits a government entity in relation to investment advisory services. [D] accepts political contributions from politicians.
[C] solicits a government entity in relation to investment advisory services.
An over-the-counter stock trader is given a quote of "14-15 workout." This quote is: [A] bona fide. [B] firm. [C] subject to confirmation. [D] approximate.
[C] subject to confirmation. EXPLANATION Workout quotes are subject quotes.
One of your clients regularly trades options. The customer feels that QRS is going to remain relatively stable or have a slight downturn and he decides to sell 1 QRS May 55 call for $2.50 when QRS is at $54.50. About a month later, the customer receives an exercise notice when QRS is trading at $60.75 per share. In terms of the exercise, what price will the client report for tax purposes in relation to the price at which the stock is sold to the buyer of the call? [A] $52.50 per share [B] $54.50 per share [C] $57.00 per share [D] $57.50 per share
[D] $57.50 per share EXPLANATION The premium received from the sale of the call is $2.50. This amount is added to the strike price in terms of overall proceeds on the transaction. The strike price is $55 per share, so the total sale amount will be $57.50 per share in proceeds. The customer will have a loss if the sale was uncovered, because the customer will be forced to buy at $60.75. Covered vs uncovered is not specified in the question.
A trade on the consolidated tape display that reads: ABC.SLD 52 means that: [A] 5,200 shares were traded [B] ABC has been sold for $52 million [C] 100 shares have just been traded for $52 per share [D] 100 shares were traded earlier, but the report is delayed
[D] 100 shares were traded earlier, but the report is delayed EXPLANATION "SLD" indicates a transaction that is reported out-of-sequence. For example, a transaction that occurred earlier in the day may be reported later in the day. It is a delayed report.
If a corporation is in liquidation, the holder of a subordinated debenture would be paid at what time? [A] Before bank loans and before accounts payable. [B] Before bank loans and after accounts payable. [C] After bank loans and before accounts payable. [D] After bank loans and after accounts payable.
[D] After bank loans and after accounts payable.
Buying power is equal to
excess equity x 2
One of your clients is a sophisticated 40 year old investor and has recently changed jobs. The client is considering rolling over his $100,000 401(k) plan with his former employer to an IRA. He invests conservatively in his personal brokerage account which is now worth $150,000. but he wants to speculate in his IRA account investments because he feels that he can take risks since he won't need the money until retirement. What is the best advice a BOM should give a RR about this customer? [A] The customer can make any investment decision that he chooses. [B] Speculating in an IRA requires that the positions must be hedged to reduce risk [C] Assets in an IRA must always be invested conservatively [D] Assets in an IRA should be taken into consideration with an overview of the customer's total investment portfolio and risk profile
[D] Assets in an IRA should be taken into consideration with an overview of the customer's total investment portfolio and risk profile EXPLANATION As a general rule, IRA assets are for retirement and should be invested conservatively... but not "always". IRA assets should be viewed in the context of the customer's total investment portfolio and risk profile. This customer's personal account is invested conservatively, so he could take some risks in his IRA account. The risks do not have to be hedged. Of course, the customer can do what he wants, but the RR should make suitable recommendations in any case.
All of the following are required prior to when an employee of a member firm wants to open an investment account at another member firm EXCEPT: [A] The employee must notify in writing the employing member firm. [B] The employing firm must advise the employee of approval or disapproval of the request. [C] The employee must notify in writing the executing firm before the account is opened. [D] Duplicate confirms and statements must be provided to the employing firm.
[D] Duplicate confirms and statements must be provided to the employing firm. Once the account is approved no further notification is required UNLESS, after the approval, the employing member firm requests duplicate copies of statements and confirms from the carrying member firm.
You work at ABC Broker/Dealer. A corporation approaches you and wants to open a margin account with your firm. Which of the following documents would be required by your new accounts department to open such an account? I.Corporate resolution II.Customer's margin agreement III.Loan Consent Agreement IV.Certified copy of corporate by-laws [A] I and IV [B] II and III [C] I, II and III [D] I, II, III and IV
[D] I, II, III and IV EXPLANATION In addition to the typical customer margin agreement and loan consent agreement required when opening a new margin account, corporations must file their corporate resolution and a certified copy of their corporate by-laws when opening new accounts.
The Investment Company Act of 1940 requires that certain transactions use "forward pricing" (the valuation of mutual fund share prices as of the next computation). Which of the following transactions require "forward pricing"? I.Shares are purchased directly from the principal underwriter by individual investors. II.Shares are sold on behalf of an investor by the investor's broker/dealer through a wire order. III.Shares are redeemed directly to the fund by a customer. [A] I only [B] I and II only [C] II and III only [D] I, II, and III only
[D] I, II, and III only EXPLANATION Forward pricing is required for all purchases and redemptions of mutual fund shares.
Which TWO of the following would be affected by a corporation's decision to declare a split in the corporation's common stock? I.The corporation's working capital would be affected by such a decision. II.The corporation's retained earnings would be affected by such a decision. III.The common stock's market price would be affected by such a decision. IV.The common stock's par value would be affected by such a decision. [A] I and II [B] I and III [C] II and IV [D] III and IV
[D] III and IV When a corporation declares a split in common stock, the par value and market price of the common will change. Retained earnings and working capital are not affected by a stock split because the actual value of all common stock is not affected, only the prices of such securities (e.g., a 2 for 1 split of $100 per share stock would result in two $50 shares which is equal to $100).
Place the following types of bonds in order of highest coupon rate to lowest coupon rate, assuming all mature at the same time. I.U.S. Government Bonds II.AAA Municipal Bonds III.AAA Corporate Bonds [A] I, II, III [B] III, II, I [C] II, III, I [D] III, I, II
[D] III, I, II EXPLANATION III - Corporate bond would have the highest coupon because they are fully taxable. I - Governments are exempt from state tax only II - Munis are exempt from Federal and also in some cases exempt from state tax.
According to FINRA good delivery rules, a mutilated corporate bond must be authenticated by: [A] The buyer's broker/dealer [B] The seller's broker/dealer [C] The market maker [D] Issuer or transfer agent
[D] Issuer or transfer agent EXPLANATION To be good delivery, a bond with mutilated coupons must be authenticated by either the issuer or the transfer agent.
Which of the following is true concerning the over-the-counter market? [A] It is where customers buy and sell securities publicly with each other on an exchange floor. [B] It is an auction market. [C] Listed securities are never traded in this market. [D] It is where prices are negotiated between broker/dealers.
[D] It is where prices are negotiated between broker/dealers. EXPLANATION The OTC market is a negotiated market where listed and non-listed securities trade. When listed securities trade OTC, it is called the "Third Market".
Of the following assets, which are most likely to be included in the investment portfolio of a real estate investment trusts: [A] Farmland and parks [B] Airports and stadiums [C] Single family housing and raw land [D] New apartment houses and shopping centers
[D] New apartment houses and shopping centers Shareholders in a REIT look for income from rents received from apartment buildings and shopping centers as well as capital gains as buildings are sold at a profit. Funding for airports and stadiums would generally come from the issuance of municipal bonds, not reits.
Which type of distribution from a corporate pension plan is eligible for rollover to an IRA or another corporate plan that accepts rollovers with no additional stipulations? [A] After-tax employee contributions [B] Minimum distributions after age 70 ½ [C] A series of payments made over a 10 year period [D] Payments representing employer contributions
[D] Payments representing employer contributions EXPLANATION Under IRS codes, minimum distributions and any payment made as a series of payments over a 10-year period or more must be treated as normal distributions for tax purposes and may not be rolled over. After-tax employee contributions require separate accounting and would be treated differently than a straight, direct rollover. The best answer here would be the payments that represent employer contributions, which can be directly rolled over to another corporate plan or to a Traditional IRA without issue.
Which of the following is NOT a benefit of owning preferred stock rather than common stock? [A] Preferred could be convertible, allowing the investor a choice of conversion. [B] Preferred shares receive earnings prior to common shares. [C] Preferred shareholders have prior claims to the assets of the corporation if liquidation occurs. [D] Preferred shareholders have preemptive rights ahead of common shareholders.
[D] Preferred shareholders have preemptive rights ahead of common shareholders. EXPLANATION Preemptive rights are rights given to common shareholders only not preferred stockholders.
A customer who is going on vacation enters a GTC order to buy a particular stock. The order is executed. The customer tells the account executive that he wants the stock but will not return in time to pay for the security by the payment date. The customer states he will send a check a few days late. The account executive should do which of the following? [A] Cancel the trade immediately. [B] Pay for the stock himself with a principal's approval. [C] Transfer the order to a margin account. [D] Request an extension of time for payment.
[D] Request an extension of time for payment. EXPLANATION The client has stated the check will only be a few days late, therefore the account executive should request an extension of time for payment. The account executive should NEVER pay for the stock himself.
Which of the following is an index which is comprised of 30 blue-chip stocks that are actively traded? [A] The Wilshire Index [B] The Standard & Poor's Index [C] The Dow Jones Composite Average [D] The Dow Jones Industrial Average
[D] The Dow Jones Industrial Average EXPLANATION The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded Blue Chip stocks. It is the oldest and the most quoted market indicator.
Which of the following would NOT be indicative of "churning" in a customer's account? [A] Previous trading history showed substantially lower commission charges than the commissions generated during the last quarter. [B] The customer's investment objectives and risk tolerance do not fall in line with the large number of trades taking place in the customer's account. [C] The customer's account shows activities which generate substantial amounts of income for the RR and seemingly provide no benefit to the customer. [D] The registered representative makes several recommendations to the customer and the customer acts on the recommendations and incurs sizeable losses.
[D] The registered representative makes several recommendations to the customer and the customer acts on the recommendations and incurs sizeable losses.
An investor wants to exchange shares of one fund with shares of another fund that is within the same family of funds. Which of the following is NOT an important consideration when making such an exchange? [A] The fund's investment objectives [B] The investment risk profile of the fund [C] Tax consequences [D] The sales load of the new fund
[D] The sales load of the new fund
An investor wants to exchange shares of one fund with shares of another fund that is within the same family of funds. Which of the following is NOT an important consideration when making such an exchange? [A] The fund's investment objectives [B] The investment risk profile of the fund [C] Tax consequences [D] The sales load of the new fund
[D] The sales load of the new fund EXPLANATION When doing a conversion or switching of shares within the same family there would generally not be any sales load imposed; therefore, sales load would not be a consideration
All of the following are TRUE of mutual fund "breakpoints" EXCEPT: [A] Breakpoints are the dollar amounts of investment at which the investor is eligible for a lower sales charge percentage [B] Breakpoints must be disclosed and explained in the fund prospectus. [C] The only mutual fund class of shares that provides breakpoints are Class A shares [D] The sales practice of "breakpoint selling" is legal and is to be encouraged
[D] The sales practice of "breakpoint selling" is legal and is to be encouraged EXPLANATION "Breakpoints" are beneficial to mutual fund investors, but the sales practice of "breakpoint selling" is detrimental to mutual fund investors and is illegal. Breakpoint selling is the practice of failing to tell prospective investors about breakpoints that would lower their sales charges. Investors may qualify for breakpoints by investing additional funds, signing a letter of intent or benefiting from rights of accumulation.
Repurchase Agreements are characterized by all of the following EXCEPT: [A] Repo rates are negotiated by the parties involved. [B] Banks and thrifts use Repos to raise temporary capital funds [C] The FRB uses Repos as instruments of monetary policy [D] Their fixed maturities make them unsuitable for use by corporations
[D] Their fixed maturities make them unsuitable for use by corporations EXPLANATION Repurchase agreements (aka Repos or RPs) are sale-and-buyback agreement whereby the seller agrees to repurchase securities (usually U.S. Government securities) at an agreed price and, usually, at a stated price. They are widely used as a money market instrument and as instrument of FRB monetary policy. Rates are negotiated directly by the parties involved. Corporations like Repos because the maturities can be flexible which makes them ideal for "parking" funds for a short time.
Good-till cancelled orders have all of the following characteristics EXCEPT: [A] They will be confirmed or renewed periodically [B] They are permitted for round lots and odd lots [C] They are also called open orders [D] They are permitted for common stock only
[D] They are permitted for common stock only A good-till cancelled order (a.k.a. an open order) is a customer's order to buy a security, usually at a particular price, that remains in effect until executed or cancelled. GTC orders can be entered on Common Stock, Preferred Stock, Bonds and Options therefore choice "D" is incorrect.
A client of yours wants to put additional funds into his retirement account. He has an annual income of $400,000 and two children to support. He is considered a qualified plan participant. The best form of retirement account for this individual is: [A] A Coverdell Education Savings Account would be the client's best decision. [B] The best form of retirement plan would be a Roth IRA. [C] This client is best suited for a Rollover IRA. [D] This client would be best served by a Traditional IRA.
[D] This client would be best served by a Traditional IRA. EXPLANATION In this situation, since the individual wishes to put additional funds away for retirement, the best answer of those given would be the Traditional IRA. A - Coverdell - For educational expenses. B - Roth IRA - Income of $400,000 exceeds the maximum income limit for a Roth, and therefore they cannot contribute. C - Rollover IRA - The individual doesn't want to roll over his qualified plan, he wants to put additional funds into a retirement account. D - Traditional IRA - Allows an employed participant to make contributions of up to $5,500 annually (even if the participant has a qualified plan). If the client has a large income, they are still permitted to make a contribution of up to $5,500, but that amount will not be tax-deductible.
When a customer opens a margin account at a broker/dealer, they are required to sign certain documents. Which of the following best describes the agreement between the customer and the broker/dealer related to the terms and conditions of financing involved in purchasing on margin? [A] This is covered in the customer's new account form. [B] This is covered in a consent by the client to the loan from the broker/dealer. [C] This is covered in the customer's hypothecation agreement. [D] This is covered in the Credit Agreement for a line of credit with the customer.
[D] This is covered in the Credit Agreement for a line of credit with the customer.
A customer wishes to sell a stock just after the stock pays a dividend with a record date of Friday, October 20th. Assuming a regular-way settlement, the earliest that the customer could sell the stock and still receive the dividend is [A] Monday, October 16th. [B] Tuesday, October 17th. [C] Wednesday, October 18th. [D] Thursday, October 19th.
[D] Thursday, October 19th. EXPLANATION The ex-date on a dividend is one business day prior to the record date. In this case, the record date is listed as Friday, October 20th. This would mean that the ex-date for the security is Thursday, October 19th. The customer would have to sell on or after October 19th to still receive the dividend, making 10/19 the earliest that the customer could sell the stock and still receive the dividend.
In a regular way delivery of municipal bonds, accrued interest is computed [A] Up to and including the trade date. [B] Up to and including the settlement date. [C] Up to but not including the trade date. [D] Up to but not including the settlement date.
[D] Up to but not including the settlement date. EXPLANATION Accrued interest is always computed up to but not including the settlement date of the transaction.
The calculation of the contingent deferred sales load upon the redemption of a mutual fund is based on [A] the NAV at the time the fund shares are redeemed [B] the NAV at the time the fund shares were purchased [C] either the NAV at the time of purchase or the NAV at the time of redemption, whichever is greater [D] a percentage of either the NAV at the time of purchase or the NAV at the time of redemption, whichever is less, and generally the fee may not exceed 2%
[D] a percentage of either the NAV at the time of purchase or the NAV at the time of redemption, whichever is less, and generally the fee may not exceed 2% EXPLANATION "Typically, a fund calculates the amount of a back end sales load based on the lesser of the value of the shareholder's initial investment or the value of the shareholder's investment at redemption." (SEC publication "Mutual Fund Fees and Expenses").
All of the following are characteristics of common stock EXCEPT [A] shareholders may sue the Board of Directors for its negligence. [B] shareholders may receive pre-emptive rights. [C] shareholders have a right to part of the assets of the corporation should it liquidate. [D] annual dividend payments are guaranteed.
[D] annual dividend payments are guaranteed.
When converting accumulation units to annuity units when annuitizing a variable annuity contract, all of the following would be considered EXCEPT the [A] annuitant's age [B] annuitant's gender [C] assumed interest rate [D] beneficiary's choice of payout options
[D] beneficiary's choice of payout options EXPLANATION The choice of payout options is made by the annuitant, not the beneficiary. The annuitant's age and gender are important in calculating the number of years in the annuitant's life expectancy. The assumed interest rate is important in estimating the rate of return that the insurance company can expect to earn during the life expectancy of the annuitant.
The initial action a broker/dealer must take if a customer fails to promptly pay for a purchase of securities and no extension of time is obtained, is to [A] restrict the account for 90 days. [B] close the account permanently. [C] send an immediate notice to the NYSE of his failure to pay. [D] cancel or liquidate the transaction.
[D] cancel or liquidate the transaction. EXPLANATION The key word in the question is "initial" - after the account is liquidated it would be frozen for 90 days - but initially the firm would cancel or liquidate the transaction.
In a serial municipal bond issue, the yields and other vital data by maturity date are referred to as: [A] yield to maturity [B] redemption [C] coupons [D] scale
[D] scale EXPLANATION A serial bond issue is one with staggered maturities. Each bond certificate in the series has an indicated redemption date. A "scale" provides vital data for each redemption date including yields, the coupon rate, and the number of bonds.
