SIE Exam 01A
John Trask, one of your customers, is long 100 shares of Plantation, Inc. 6% cumulative preferred stock ($100 par). Over the last three years, Plantation, Inc. has had negative net income and Mr. Trask hasn't received any dividends during that time period. How much must Mr. Trask receive in dividend income this year before common stockholders can receive a cash dividend? $6 $24 $600 $2,400
$2,400 Even though the stated dividend is 6%, the Board of Directors must still declare it. Without sufficient earnings for the previous three years, the dividend could not be paid and therefore no common dividends could be paid. Currently, there is $1,800 (6% x $100 par x 100 preferred shares x three years) of preferred dividends in arrears that must be paid to Mr. Trask before a dividend can be paid to common shareholders. Add the $600 that Mr. Trask would need to be paid for this year to the $1,800 from past years and $2,400 must be paid to him before a common dividend can be paid.
A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is: $950.87 $952.80 $958.75 $9,587.50
$958.75 U.S. government bonds are quoted as a percentage of par with a fraction in 32nds of a point. Therefore, a T-bond quoted at 95.28 is equal to 95 28/32. By converting the fraction to a decimal, the quote becomes which is 95.875% of the par value of $1,000. $1,000 x 95.875% = $958.75.
A convertible bond has a conversion price of $40 and is currently selling in the market at $950. The conversion ratio is: 25 23.75 40 38
25 To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($40). In this question, the conversion ratio is $25 ($1,000 ÷ $40). To calculate the conversion ratio, the market price of the bond is irrelevant.
A company wants to buy back some of its shares from existing shareholders through a tender offer. The company offers to buy a maximum of $5,000,000 shares at $15 apiece, but sets no minimum number of shares to purchase. A shareholder wants to sell 3,000 shares. If 4,900,000 shares have been tendered, how many of the investor's share will the company buy?
3,000 This is a simple math problem 5,000,000 - 4,900,000 = 100,000 shares outstanding. The guy wants to sell his 3,000 shares, since there is no minimum number of shares the company can buyback those 3,000 shares with still have 97,000 shares left to tender (buyback).
A company has announced a tender offer for its shares at $50. The issuer wants to purchase a minimum of 100,000 shares, up to a maximum of 1,000,000 shares. If 80,000 shares are tendered, how much will an investor receive if he has tendered 1,000 shares? A. $0 B. $50,000 C. $40,000 D. $4,000
A. $0 Explanation: Since the tender offer has a minimum of 100,000 shares and only 80,000 shares have been tendered by investors (i.e., put up for sale), the company will not buy any shares. If the tender had crossed over the minimum of 100,000, then the investor would have tendered all of his shares and received $50,000. If the tender had gone over the maximum, the investor's tender would be filled on a pro-rata basis.
A 5%, $1,000 par value bond sells at $900 and matures in 10 years. What is the amount of each interest payment? A. $25 B. $45 C. $50 D. $90
A. $25 Explanation: Bonds pay interest every 6 months (semi-annually). The dollar amount of interest payments is computed as a percentage of the par value. In this example, the coupon rate is 5%. The annual interest payment is $50 (5% of $1,000 par value). Each interest payment is one-half of that amount, or $25.00
An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is: A. 5.30% B. More than 5.30% C. Between 5.30% and 5.75% D. 5.75%
A. 5.30% Explanation: The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond's yield will be the same as the coupon rate, which is 5.30%.
Which of the following is the likely result of persistent deflation? A. A decrease in interest rates B. A decrease in the level of inflation C. A decrease in bond prices D. An increase in the value of equities
A. A decrease in interest rates Explanation: Deflation is considered a reduction in the general level of prices. Deflation leads to lower interest rates, which results in higher bond prices. Equities tend to perform well during periods of inflation, not deflation.
Which of the following is classified as a joint account? A. An account shared between two brothers B. An account established under UGMA/UTMA. C. An account with third party trading authorization. D. A spousal IRA.
A. An account shared between two brothers. Explanation: In a joint account, all participants are considered part owners of the account. The custodian of a UGMA account manages the account, but the minor is the owner of the securities. Likewise, a person with third-party trading authorization can help manage the account, but is not an owner. All IRA accounts are individual accounts; there are no joint IRAs. A spousal IRA is owned by the spouse whose name is on the account. This is true even if the other spouse earned the income that was contributed to the account.
In which of the following funds is the % that's invested in each of the various asset categories adjusted as financial markets change? A. An asset allocation fund B. An S&P Index fund C. A bond index fund D. A growth fund
A. An asset allocation fund Explanation: Asset allocation funds hold diversified portfolios of stocks, bond, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time-to-time, often according to computer models.
A stock that typically performs in parallel to the changes in the economy is referred to as a: A. Cyclical stock B. Defensive stock C. Growth stock D. Value stock
A. Cyclical stock Explanation: The performance of a cyclical stock normally runs parallel to changes in the economy. Examples of cyclical stocks include machine tool companies, construction firms, as well as transportation and energy companies.
The investments in a Coverdell Education Savings Account (CESA) are: A. Determined by the investor B. Determined by the firm through which it's opened C. Limited to AAA rated bonds D. Limited to mutual funds
A. Determined by the investor Explanation: Investments in a CESA are self-directed, which allows investors to buy and sell virtually any and all types of securities. Conversely, Section 529 Plans are not self-directed; instead, the investments are determined by the entity that manages the plan.
A firm is the managing underwriter of a follow-on offering of a security that is listed on the NYSE. The aftermarket prospectus delivery rule: A. Does not require the firm to deliver a prospectus. B. Requires the firm to deliver a prospectus for 25 days C. Requires the firm to deliver a prospectus for 40 days D. Requires the firm to deliver a prospectus for 90 days
A. Does not require the firm to deliver a prospectus Explanation: If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there's no aftermarket prospectus delivery requirement for dealers. An issuer that's listed on the NYSE or NASDAQ is required to file reports with the SEC (a reporting issuer). IF the issuer was filing for an IPO (a non-reporting issuer) and the securities will be subsequently listed on the NYSE or NASDAQ, the firm is required to deliver a prospectus to any purchaser in the aftermarket within 25 days of the effective date.
Which of the following statements BEST describes exchange-traded notes (ETNs)? A. ETNs are debt instruments linked to the performance of a commodity, currency, or index B. ETNs are equity securities that pay a large dividend C. ETNs are mutual funds that invest in debt instruments D. ETNs are equity securities that represent ownership of a securities exchange.
A. ETNs are debt instruments linked to the performance of a commodity, currency, or index Explanation: Exchange-traded notes (ETNs) are a type of unsecured debt security.
When interest rates are trending upward, the economy will normally be in which phase of the business cycle? A. Expansion B. Trough C. Peak
A. Expansion Explanation: Increasing interest rates, along with increased costs and lower unemployment, is frequently associated with an expanding economy where there's an increasing demand for goods. As demand overtakes supply, prices begin to rise due to the scarcity of goods. This rise in prices is known as inflation. The Federal Reserve will look to raise interest rates in an attempt to curb demand and combat inflation.
A previously registered person was convicted of a Felony 14 years ago and has served out his sentence in federal prison. If he's now seeking employment as a Registered Representative, he should be informed that: A. He may be hired as a (RR) B. He may not be hired as a (RR)
A. He may be hired as a (RR) Exp.: A convicted felon is barred from the securities business for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. Since the conviction was more than 10 years ago, the person may be hired as a (RR). There are no special restrictions concerning registration and compensation of the person who was previously subject to statutory disqualification.
Three business partners have opened a brokerage account as Joint Tenants with Right of Survivorship (JTWROS). All of the following statements are TRUE, EXCEPT: A. If one partner dies, his interest in the account will pass to his estate B. The firm may accept an order from any of the partners C. Checks that are issued by the firm from the account must be in the name of all of the owners D. When opening the account, the firm must obtain Social Security numbers from all three owners
A. If one partner dies, his interest in the account will pass to his estate Explanation: An account that is established under the JTWROS, the interest of a deceased owner will pass to the surviving owners of the account. If the account had been opened under the Tenants-in-Common form of ownership, the deceased partner's portion would flow to their estate.
A (RR) is sending an email to 5 clients. Which of the following statements is TRUE? A. It is considered correspondence and subject to review by a principal. B. It is considered correspondence and subject to pre-approval by a (P) C. It is considered retail communication and subject to review by a (P) D. It is considered retail communication and subject to pre-approval by a principal.
A. It is considered correspondence and subject to review by a principal. Explanation: It is considered correspondence and subject to review by a (P). Correspondence is defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Retail communications are generally subject to pre-approval; however, correspondence and institutional communications are subject to review and supervision.
Which of the following statements is NOT TRUE about a fidelity bond? A. It protects customers in the event their broker-dealer goes bankrupt. B. It's insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. C. FINRA must be notified if the bond is cancelled or substantially modified. D. It covers securities that are held at the brokerage firm as well as those in transit.
A. It protects customers in the event their broker-dealer goes bankrupt. Explanation: A fidelity bond does not protect customers in the event of broker-dealer bankruptcy; that's the role of SIPC. Instead, a fidelity bond is insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. The bond covers securities that are held the brokerage firm as well as those in transit. FINRA must be notified if the bond is cancelled or substantially modified.
Which types of investments have historically shown a great deal of sensitivity to regulatory risk? A. Limited partnerships B. Corporate bonds C. Common stocks D. Variable annuities
A. Limited partnerships Explanation: Regulatory risk is the possibility that changes in regulations can have an adverse impact on the value of investments. This is very similar to legislative risk, which is the risk associated with changes in laws. Although, all kinds of investments can be subject to regulatory and legislative risk, limited partnerships have historically been particularly vulnerable. For example, adverse changes in the tax laws can cause the value of many limited partnerships to decline.
If an investor wants to receive immediate execution, he should enter a: A. Market order B. Stop order C. Limit order D. Stop limit order
A. Market order Explanation: Market orders provide immediate execution. On the other hand, limit orders, stop orders, and stop limit orders require a certain price to be reached before they are activated and/or executed.
An investor has a portfolio in which 25% is invested in an oil company, 35% is invested in a pharmaceutical stock, 30% is invested in an exchange-traded fund that tracks the S&P 500 Index, and the final 10% is invested in money-market funds. Which of the following risks is inherent in the portfolio? A. Non-systematic B. Political C. Credit D. Liquidity
A. Non-systematic Exp.: Non-systematic risk is specific to one company and can be diversified away by diversifying a portfolio. Since the investor has put 60% of her portfolio into only two stocks, she is not diversified and is exposed to a large amount of non-systematic risk. Credit risk is typically associated with bonds and is the risk that an issuer cannot repay its interest and/or principal. Liquidity risk is the inability to sell an asset easily, which is not a concern in this portfolio since exchange-traded stocks are typically liquid. Political risk is associated with politicians making decisions that will impact an investment.
An investor shifted the allocation of corporate bonds in his portfolio to American Depository Receipts (ADRs). As a result, he will be more exposed to: A. Political risk B. Liquidity risk C. Credit risk D. Interest-rate risk
A. Political risk Explanation: ADRs are depository receipts for foreign equities. Although, ADRs trade in the U.S., they are subject to the risks of investing in foreign securities. Political risk is the risk that foreign investors will lose money as a result of changes in a specific country's government or regulatory environment. Many investments are subject to liquidity risk. Credit and interest-rate risk are usually associated with bond investments.
If a customer purchases securities and fails to pay for them by the payment date, the brokerage firm will: A. Sell out the securities and freeze the account B. Notify the Federal Reserve Board C. Notify the SEC D. Close the customer's account for a specified period
A. Sell out the securities and freeze the account Explanation: When a customer purchases securities and fails to pay by the Reg T payment date (within 2 business days following settlement), the brokerage firm will sell out the securities and freeze the account for 90 days.
When do options trades settle? A. T + 1 B. T + 2 C. T + 4 D. At expiration
A. T + 1 Explanation: Options trades typically settle within one business day (T + 1). However, if equity options are exercised, the settlement of the stock transactions occurs on the second business day (T + 2).
Who is responsible for creating the official statement for a municipal bond offering? A. The issuer B. Bond counsel for the issuer C. The underwriting syndicate D. Bond counsel for the underwriting syndicate
A. The issuer Explanation: Although assistance may be provided by others, the issuer is ultimately responsible for creating the official statement. If created, the underwriting syndicate is responsible for providing the official statement to investors who purchase the new offering.
A common shareholder is not entitled to: Vote for the board of directors Receive dividends if voted for by the board of directors Give or sell shares to anyone she wishes Appoint officers of the corporation
Appoint officers of the corporation Shareholders have the right to vote for the board of directors, but not to appoint officers of the corporation.
If a temporary hold has been placed on an account, it will expire: A. After two business days B. After 15 business days C. After 30 days D. After the firm completes its investigation of the account
B. After 15 business days Explanation: If a temporary hold is placed on the acct. of a specified adult, it will expire no later than 15 BUSINESS days after the date that it was first placed on the account, unless it was otherwise terminated or extended by another authorized regulatory entity. The temporary hold may be extended by the firm for no longer than 10 business days following the date, unless it was otherwise terminated or extended by another authorized regulatory entity.
Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT: A. They trade in the OTC market B. All are government guaranteed C. Short-term securities are quoted on a discount yield D. Long-term securities are quoted as a % of par
B. All are government guaranteed.
A client wants to invest $250/month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client? A. A managed closed-end fund B. An S&P 500 Index mutual fund C. An S&P 500 Index exchange-traded fund D. An DJIA exchange-traded fund
B. An S&P 500 Index mutual fund
A husband and wife have combined earnings of greater than $300,000 in each of the last two years. If it's reasonably expected that this level of income will remain the same, the couple is considered: A. A qualified investor B. An accredited investor C. An institutional investor D. A qualified institutional buyer (QIB)
B. An accredited investor Explanation: Accredited investors have a net worth of $1 Million (excluding their primary residence) or annual income of $200,000 in each of the last two years. For married couples to be considered an accredited investor, they need to have income of at least $300,000. A qualified institutional buyer (QIB) must be an institution with $100 Million in assets under management (AUM), but is NOT a natural person.
Which of the following persons can a registered representative either make a loan to or borrow money from without providing notification to her employer? A. Another employee of an affiliated broker-dealer B. An institution that's in the business of borrowing or lending funds C. An individual with whom the (RR) maintains a personal relationship D. A company with which the (RR) has a business relationship.
B. An institution that's in the business of borrowing or lending funds Further Explanation: Registered representatives can borrow money from or loan money to a customer that regularly provides loans (e.g., a bank) without permission. However, for an (RR) to borrow from other employees, friends, and business partners, she's required to obtain permission from her employer.
A corporation will be paying a cash dividend to its shareholders. On what date will the market price of the stock be reduced? A. Declared date B. Ex-date C. Record date D. Payment date
B. Ex-date Explanation: The ex-date is the first day that a stock trades without its dividend included in its price. On the ex-date, the stock's price is reduced by the amount of (or enough to cover) the dividend.
All of the following characteristics would be associated with a growth company, EXCEPT that it has a: A. High price/earnings ratio B. High dividend payout ratio C. High amount of research and development costs D. Wide trading range for the price of its stock
B. High dividend payout ratio Explanation Growth companies will normally retain most of their earnings to enable them to continue their growth. They would typically have low dividend payout ratios, high research and development expenses, and high price/earnings ratios, as well as a wide trading range for the stock.
A registered person has purchased two tickets to attend a basketball game with a client. If the tickets cost $85 each, which of the following statements is untrue? A. Under FINRA rules, this is considered entertainment. B. If the registered person did not attend the game and gave one of the tickets to the client, it is a violation. C. If the registered person did not attend the game and gave both of the tickets to the client, it is a violation. D. This doesn't require the approval of a principal of the firm.
B. If the registered person did NOT attend the game ad gave one of the tickets to the client, it is a violation. Gifts over $100 must not occur per year.
The type of market in which an issuer raises capital by selling its securities to investors is referred to as the: A. Secondary market B. Primary market C. Third market D. Fourth market
B. Primary market Explanation: The type of market in which an issuer raises capital by selling its securities to investors is referred to as the primary market. The secondary market is where investors that purchased securities in the primary market, then sell them to other investors. The third market involves securities that are listed on an exchange (e.g., the NYSE or NASDAQ) are traded in the Over-the-Counter (OTC) market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges.
A (RR) intends to sell interests in a private placement to her clients, but they will not be offered through her firm. If she will not be compensated for the transactions, she must: A. Provide written notice to FINRA B. Provide written notice to her firm C. Provide verbal notice to her firm D. Receive written approval from her firm to participate
B. Provide written notice to her firm Ex.: The Self-Regulating Organization rule regarding private securities transactions requires a Registered person to provide written notice to her firm if she will be engaging in securities transactions that are outside of the scope of her firm's business. If she will be compensated for the transactions, she must also receive written approval from her firm to participate. However, even if she's not to be compensated, her firm still has the ability to impose conditions on her participation.
A covered call writer can be described as being: A. Short the call, and short the stock B. Short the call, and long the stock C. Long the call, and short the stock D. Long the call, and long the stock
B. Short the call, and long the stock Explanation: When writing (or selling) the call, the investor is said to be short the call. A covered call writer will currently own the underlying securities, and hence be long the stock.
Who keeps track of the shareholders of a mutual fund? A. The Custodian Bank B. The Transfer Agent C. The Investment Adviser D. The Underwriter
B. The Transfer Agent Explanation: The mutual fund's transfer agent is responsible for keeping track of all of the current owners of a mutual fund. Custodian banks provide for the safekeeping of the fund's securities and cash. The fund's portfolio is managed by the investment adviser.
All of the following persons are permitted to be named as a trusted contact person for a senior investor, EXCEPT: A. A family member B. A business associate C. A law firm D. A friend
C. A law firm Explanation: To be a trusted contact person for a senior investor, the only requirements are that the person must be a natural person (not a law firm) and be at least 18 years old.
A 529A or ABLE account is permitted for which of the following persons? A. A person who is receiving retirement benefits B. A person who is saving for college C. A person who has a significant disability D. A person who is a minor
C. A person who has a significant disability Explanation: Similar to 529 college savings plans, 529 ABLE (or simply referred to as 529A) accounts are savings accounts that are created and administered by states under the Achieving a Better Life Experience (ABLE) Act. These accounts are designed to supplement the support of persons who are disabled or who meet the government's definition of disabled and are receiving Social Security disability, Medicaid, or private insurance payments.
As it relates to the sale of variable contracts, which of the following is NOT considered non-cash compensation under FINRA rules? A. A gift B. A meal C. Commissions D. Lodging expenses
C. Commissions Explanation: FINRA has specific rules for both "CASH" and "NON-CASH" compensation when selling variable annuities and variable life insurance. According to FINRA, "CASH" compensation includes discounts, concessions, fees, service fees, commissions, asset-based sales charges, loans, overrides, or cash benefits received. "Non-cash" compensation includes merchandise, gifts and prizes, as well as expenses for travel, meals, and lodging.
Which of the following risks does not apply to both foreign and domestic debt instruments? A. Political B. Repayment C. Exchange D. Interest rate
C. Exchange Explanation: Exchange (rate) risk could result in investors suffering losses due to a foreign currency losing value against the U.S. dollar. However, an investor who buys U.S. dollar denominated (domestic) debt is not subject to exchange risk. Interest rate risk is experienced when interest rates rise and prices of bonds fall, which impacts both foreign and domestic bonds. Repayment risk is an issue that impacts both foreign and domestic debt, since both foreign and U.S.-based issuers could default. Political risk could also impact both foreign and U.S. investments.
Final arbitration awards against (RR) and/or firms are reported on which of the following forms? A. Form U5 B. Form U4 C. Form U6 D. Form BD
C. Form U6 Explanation: Form U6 is used to report disciplinary actions against RR's and firms as well as final arbitration awards against individuals or firms. Form U4 is filed with FINRA when a person is applying for securities registration. Form U5 is filed with FINRA when a person's registration is terminated. Form BD is filed by brokerage firms to register with FINRA, the SEC, and states.
If a company is utilizing statutory voting, how many votes will a common shareholder receive per vacant seat on the board? A. One vote for each vacant position on the board B. One vote for each director that's present at the meeting C. One vote for each share that the stockholder owns D. One for each proxy that's filed by the board of directors
C. One vote for each share that the stockholder owns Explanation: When using the statutory voting method, a shareholder is given one vote, per share, per open seat on the board. For example, if an investor owns 1,000 shares and there are three openings on the board, she's able to cast 1,000 votes for the three open seats. If she chooses not to use all of her 1,000 votes per open seat, she cannot transfer them to another candidate. If the company utilized a cumulative voting system, a shareholder is able to multiply the number of shares owned by the number of open seats on the board. With this method, the stockholder is able to be very selective in how to cast her votes. For example, a stockholder may choose to use all of her votes for only one candidate, thereby making it more likely that her candidate will gain a seat on the board.
The current market value of a stock is below the strike price of a call option. This situation is referred to as: A. At-the-money B. In-the-money C. Out-of-the-money D. Behind-the-money
C. Out-of-the-money Explanation: Call options are in-the-money when the current market value of the underlying stock is above the option's strike price. However, if the stock's market price is below the strike price of a call, the option is out-of-the-money. Out-of-the-money and at-the-money options have no intrinsic value.
A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences? A. All proceeds are considered a return of capital. B. The growth is taxable as a capital gain to the beneficiary. C. Proceeds in excess of cost are taxable as ordinary income to the beneficiary. D. The growth above cost is not taxable if the beneficiary rolls it over into a retirement plan.
C. Proceeds in excess of cost are taxable as ordinary income to the beneficiary.
When bond issues have staggered maturity dates, they are referred to as: A. Term bonds B. Sinking fund bonds C. Serial bonds D. Zero-coupon bonds
C. Serial bonds Explanation: Bonds with staggered maturity dates are referred to as serial bonds. For serial bonds, the principal amount outstanding is reduced over time. On the other hand, term bonds have one maturity date.
The main disadvantage of 529 Prepaid Tuition Plans compared to 529 Savings Plans is that: A. Distributions that are not used to pay for educational expenses are subject to a 10% tax penalty B. Qualified distributions may be used to pay for tuition, books, room and board, and other expenses C. The account owner may lose financially if the student does not attend a public school in that state D. The account owner can lock-in the beneficiary's tuition at a state college at a reduced rate
C. The account owner may lose financially if the student does not attend a public school in that state Explanation: The main disadvantage of a prepaid tuition plan is that the investor may suffer financially if the beneficiary attends an out-of-state or private college. Unlike 529 Savings Plans, prepaid tuition plans do not have distributions. Instead, the account owner purchases credits toward tuition at a state university or college. Prepaid tuition plans generally may not be used to save money for other educational expenses such as room and board. The advantage of a prepaid tuition plan is that the investor is guaranteed a certain number of credits toward the beneficiary's tuition.
A confirmation must be sent to a customer no later than: A. The Trade Date B. The business day after the settlement date C. The completion of the trade D. Two business days after the settlement date
C. The completion of the trade Explanation: A broker-dealer must send a confirmation to a customer at or before the completion of the transaction, which is usually the settlement date.
Regulation T requires payment from a customer in how many days? A. By settlement date B. One business day following regular-way settlement C. Two business days following regular-way settlement D. Three business days following regular-way settlement
C. Two business days following regular-way settlement Explanation: Regulation T requires payment from a customer in two business days following regular-way settlement.
When a bond is called, the bondholder receives the: A. Call Price B. Call Price plus (+) accrued interest C. Market Price D. Market Price plus (+) accrued interest
Call Price plus (+) accrued interest The bond holder receives the call price (either at par or at a premium) plus accrued interest earned up to the call date.
When a bond is called, the bondholder receives the: Call price Call price plus accrued interest Market price Market price plus accrued interest
Call price plus accrued interest The bondholder receives the call price (either at par or at a premium) plus accrued interest earned up to the call date.
The FDIC provides coverage for: A. Certificates of Deposit (CDs) B. Fixed annuities C. Life Insurance D. Variable Annuities
Certificates of deposit (CDs)
Which of the following investments is the MOST suitable for a person who is interested in aggressive growth? Common stock High-yield bond fund High-rated bond Preferred stock
Common stock Of the choices listed, common stock has historically provided the greatest potential for growth. Bonds and preferred stock are typically suitable for investors who are seeking income.
A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently sold at 96. What is the current yield? A. 7.0% B. 7.5% C. 8.0% D. 8.3%
D. 8.3% Explanation: To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. The yearly interest is $80. The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%). .08/96 = 0.083333
What's a general obligation (GO) bond? A. A bond that's backed by the taxes of the U.S. government B. A bond that's backed by the revenues of a local corporation C. A bond that's backed by the revenues of a project which is operated by a local municipality D. A bond that's backed by taxes imposed by a local municipality
D. A bond that's backed by taxes imposed by a local municipality Explanation: A general obligation (GO) bond is a type of municipal bond. On a GO bond, the debt service (i.e., interest and principal payments) are paid for by taxes imposed by a municipality. On the other hand, revenue bonds are backed by the revenue of a municipal project or facility. Corporate bonds are backed by a corporation. Treasury bonds are backed by the full faith and credit as well as the taxing authority of the U.S. federal government.
If a broker-dealer's trading desks purchases a large block of stock during the last minutes of trading in an effort to drive up the price, it is: A. An acceptable practice that's referred to as a block trade B. An acceptable practice that's referred to as trading ahead C. A prohibited practice that's referred to as backing away D. A prohibited practice that's referred to as marking-the-close.
D. A prohibited practice that's referred to as marking-the-close. Explanation: The execution of a series of trades at or near the opening or closing of trading in an effort to influence the price of a security is a form of manipulation that's referred to as marking-the-opening or marking-the-close. Traders can execute customer orders or change the amount of securities they own to have securities available for customers; however, buying or selling the security to influence its price is considered manipulative.
When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's: A. Market maker B. Principal C. Designated market maker D. Agent
D. Agent Explanation: A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown.
A broker-dealer must establish information barriers between which two departments? A. Research and compliance B. Retail and institutional sales C. Human resources and retail sales D. Investment banking and trading
D. Investment banking and trading Explanation: Information barriers must be maintained at firms to prevent the flow of certain information between different departments at the firm. Much of the focus is on preventing the free flow of information between investment banking and other departments. In fact, most of the communication between investment banking and other departments is made through compliance.
Which of the following are short-term trading vehicles? A. Mutual funds B. Oil and gas programs C. Real estate programs D. Leveraged ETFs
D. Leveraged ETFs Exp.: Due to the inherent volatility of leveraged ETFs, they are appropriate as short-term trading vehicles. Each of the other choices are considered longer term investments.
Which of the following securities would be subject to federal securities registration requirements? A. Securities offered through a private placement B. GNMA securities C. Municipal bonds D. Mutual fund shares
D. Mutual fund shares Explanation: Mutual fund shares would be subject to registration requirements at the state and federal level. The other securities are exempt from federal and state registration requirements. GNMA securities (U.S. government agency securities) and municipal securities are exempt securities. Private placements are exempt offerings.
A RR persuades a customer to purchase a security by assuring her that, should it fall in value, the representative will make up the difference in the account. This practice is: A. Permitted if the arrangement is in writing and preapproved by the firm B. Permitted if the customer maintains an outside business relationship with the representative C. Permitted if the customer is an immediate family member D. Not permitted
D. Not permitted Exp.: Guaranteeing a customer against a loss is prohibited, regardless of the relationship.
When is a dividend payment made? A. On the payment date B. On the record date C. On the ex-dividend date D. On the declaration date
D. On the payment date Explanation: A company will pay its shareholder a dividend on the payment date. The record date is the date that an investor must own the stock to be entitled to the dividend. The ex-dividend date is the first day that an investor can buy stock w/o receiving the dividend. The declaration date is the date on which the company announced that it will pay a dividend.
A broker-dealer is acting as a distribution participant in a public offering of stock. To entice customer purchases, the firm pledges to repurchase shares sold in the offering from its customers at a price that's higher than the original public offering price (POP). This type of pledge is: A. Prohibited unless the customers are free to sell the securities into the open market B. Allowed if the firm immediately sets aside funds for the repurchase C. Allowed if the customers' securities and cash are deposited into escrow D. Prohibited, fraudulent, and manipulative
D. Prohibited, fraudulent, and manipulative Explanation: This question relates to a tie-in arrangement, which may be used to ARTIFICIALLY increase the price of a stock in the SECONDARY MARKET. These prearranged purchases are PROHIBITED because they are manipulative and harm other market participants. Underwriters are prohibited from prearranging purchase orders which guarantee the clients a profit (i.e., buying shares back at a price that's equal to or higher than the POP).
A Registered Representative has recently passed the Series 7 Exam. If the (RR) conducts business in 5 states, she is required to: A. Register in 3 of the 5 states B. Notify FINRA, but not required to register in any of the states C. Register in the states in which she has an office D. Register in all 5 states
D. Register in all 5 states Explanation: In addition to ensuring that RRs are properly registered under FINRA rules, RRs also need to be properly registered as agents in each state in which they conduct business. State registration rules are contained within the Uniform Securities Act.
FINRA prohibits selling away and it can be best described as: A. Recommending that a customer use the services of another Broker-Dealer (BD) B. Splitting commissions with other (RR) of the same (BD) C. Advising customers to buy mutual fund shares at a dollar amount just below a discount level D. Selling securities in private transactions w/o prior written consent of the employing (BD)
D. Selling securities in private transactions w/o prior written consent of the employing (BD)
An equity inverse exchange-traded fund (ETF) is most similar to: A. A real estate investment trust (REIT) B. Buying on margin C. An equity mutual fund D. Selling stock short
D. Selling stock short Explanation: An equity inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. Similarly, a customer who sells stock short is anticipating a decline in the price of the equity securities. For example, an inverse ETF that's based on the DJIA seeks to deliver the opposite performance if that index. Therefore, if the DJIA rises by 1%, an inverse ETF's value should decrease by 1%. Conversely, if the DJIA falls by 1%, the inverse ETF's value should increase by 1%.
If a customer exceeds SIPC limits: A. The customer will receive cash rather than his securities B. The customer is a secured creditor C. The customer doesn't have a claim to the excess amount D. The customer is a general creditor
D. The customer is a general creditor.
Obtaining best execution includes all the following factors, EXCEPT: A. Price and volatility B. The general character of the market C. The size and type of transaction D. The number of market makers for the security
D. The number of market makers for the security Explanation: For purposes of obtaining best execution, the factors considered include price and volatility of the security, general character of the market, size and type of transaction, and the locations and accessibility of the number of market makers for the security is not a factor.
Which of the following is TRUE if a mutual fund investor chooses to implement a systematic withdrawal plan from the fund? A. The dividends and capital gains that are generated from the fund will be sufficient to make the payments. B. All payments will end on a specific date. C. The amount of each payment will remain the same. D. The withdrawals result in a reduction of capital.
D. The withdrawals result in a reduction of capital. Explanation: The only true statement is that the plan results in the reduction of capital, since shares will need to eventually be redeemed to make payments. Systematic withdrawal plans provide an investor with regular payments. These payments can be structured as fixed-dollar, fixed-%, or fixed-time. The option chosen determines whether the payments will remain the same or whether they will cease on a specific date. Payments will first come from dividends and capital gains that are generated from the fund, but after those funds are no longer sufficient, shares will be redeemed to provide the payments.
Which of the following descriptions characterizes leveraged Exchange-Traded Funds (ETFs)? A. They are designed to deliver the same performance as an index or other benchmark B. They are designed to deliver a multiple of the performance of an index or other benchmark C. They are designed to deliver the opposite of the performance of an index or other benchmark D. They are designed to deliver a multiple of the opposite performance of an index or other benchmark
D. They are designed to deliver a multiple of the performance of an index or other benchmark Explanation: A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3x leveraged ETF based on the DJIA seeks to deliver 3x the performance of that index. So, if the DJIA rises or falls by 1%, a leveraged ETF would increase or decrease by 3% before fees and expenses. The other choices include a regular ETF which equals the performance, an inverse ETF which seeks to deliver the opposite of what it is tracking, and a leveraged inverse ETF designed to deliver a multiple of the opposite direction.
What is the MAX profit for the buyer of a call option? A. The premium B. The strike price C. The strike price minus (-) the premium D. Unlimited
D. Unlimited Explanation: The maximum gain for the buyer of a call option is unlimited. A buyer of a call option will realize a profit if the underlying stock rises above the breakeven point. Since a stock's increase is unlimited, so too is the potential profit for the buyer of a call. On the other hand, if the stock doesn't rise and instead falls below the strike price (i.e., the option is out-of-the-money) the buyer's maximum loss is the premium paid.
In judging the fairness of a firm's markup, industry rules would NOT consider: A. Whether the security was debt or equity B. The availability of the security in the market C. The pattern of markups D. Whether the client was a retail or institutional customer
D. Whether the client was a retail or institutional customer Explanation: Among the relevant factors that a member may consider in determining a fair markup or commission are the following. - The type of security involved (Common stock would normally demand a higher markup than debt). - The availability of the security in the market (actively or inactively traded) - The price of the security - The amount of $ involved in the transaction - Disclosure (made prior to the execution of the transaction may be relevant) - The pattern of markups - The nature of the member firm's business (What type of services does the member provide to customers?) The client is not specifically mentioned in the rules as determining whether the markup or commission is fair and reasonable.
A brokerage firm purchases 600 shares of stock from a customer and places the securities into its inventory. In this case, the firm likely acted as a(n): A. Dealer B. Designated market maker C. Agent D. Underwriter
Dealer When a broker-dealer buys a security from a customer by using its own funds and places the securities into its inventory, it has acted as a dealer (principal). In this situation, the customer is charged a markdown on the transaction. If the firm bought the security for a customer or sold a security to a customer without being the other side of the transaction, it would be acting as a broker (agent) and it would charge the customer a commission. An underwriter assists an issuer in raising capital in the primary market by purchasing the securities from the issuer and selling them to customers. The firm that controls trading on an exchange for a specific stock is referred to as a designated market maker (DMM).
Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds? Increasing interest rates Stable interest rates Volatile interest rates Decreasing interest rates
Decreasing interest rates Call protection would be most valuable to a purchaser of bonds when interest rates decline. If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call bonds when interest rates decline so it can issue new bonds with lower rates of interest. Although bonds may be callable at a small premium above par value, if the bonds are not callable, the investor may realize the full benefit of an increase in the market price of the bonds.
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be: A. $1,051.25 B. $1,052.40 C. $1,054.00 D. $1,057.50
Explanation: U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price: Step 1: 105.24 is equal to 105 24/32 Step 2: Convert 24/32 into a decimal, which is 0.75 Step 3: Convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay: $1,057.50
Banks, savings account are guaranteed and insured by the:
FDIC In the event that a bank is unable to pay its depositors, the Federal Deposit Insurance Corporation (FDIC) guarantees bank accounts up to $250,000. The Securities Investor Protection Corporation (SIPC) protects brokerage customers against broker-dealer bankruptcy.
Which of the following organizations enforces municipal securities regulations for broker-dealers? The FRB The FDIC FINRA The MSRB
FINRA Although the MSRB creates rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: The SEC or FINRA for broker-dealers The comptroller of the currency for federal banks The FRB for state banks that are members of the FRB The FDIC for member banks of the FDIC
Which of the following government agencies is not involved in the housing market? Federal National Mortgage Association (FNMA) Federal Home Loan Mortgage Corporation (FHLMC) Federal Home Loan Banks (FHLB) Government National Mortgage Association (GNMA)
Federal Home Loan Banks (FHLB) The Federal Home Loan Banks are not involved in the housing market. Instead, the FHLB provides liquidity to savings and loan institutions by lending them money if/when they are in need of funds.
The purpose of a depository facility is to: A. Clear transactions in equity securities B. Clear transactions in fixed-income securities C. Hold securities in book-entry form D. Ensure that dividend payments are sent to investors by the issuers of the securities
Hold securities in book-entry form The Depository Trust Corporation (DTC) is a subsidiary of the Depository Trust & Clearing Corporation (DTCC) and its primary function is to hold securities in book-entry form. This allows broker-dealers to buy and sell securities on behalf of their customers without the costs and time associated with physical certificates. A change of ownership is made from the account of the selling broker-dealer to the account of the buying broker-dealer. The DTC is not a clearing facility.
Which of the following statements is not true regarding the characteristics of options and warrants? Warrants are created by the corporation whose stock underlies the instrument; options are created by contract between an option buyer and an option writer. Both options and warrants can expire worthless if they are not exercised. If options are exercised, a set price must be paid for the underlying security; if warrants are exercised, the securities are received at no additional cost. Both options and warrants can be bought and sold in the secondary market.
If options are exercised, a set price must be paid for the underlying security; if warrants are exercised, the securities are received at no additional cost. Both options and warrants have a strike price—if exercised, the transactions for the underlying security will occur at that set price. It is in the case of convertible bonds or preferred stock that investors can convert the security into the underlying stock with no additional payment of money. All other statements are true.
When purchasing Treasury notes, an investor should understand: Delivery is in either book entry or physical form Interest is paid at maturity Interest is paid semi-annually Principal is adjusted for inflation
Interest is paid semi-annually Treasury notes and bonds pay interest semi-annually. Treasury securities are only issued in book entry form. Treasury Inflation Protected Securities (TIPS) are adjusted for inflation.
A bond is selling at a premium. This indicates that: The yield to maturity is greater than the nominal yield The market price is less than the par value Interest rates have decreased since the bond was issued The nominal yield is less than the current yield
Interest rates have decreased since the bond was issued The amount that the market price exceeds the par value is known as a premium. One reason for selling at a premium is a decrease in interest rates after the bonds were issued. When looking at the yields for premium bonds, the nominal yield is the highest, followed by the current yield, with the yield to maturity being the lowest yield of the three.
A BD that does not hold a customer's cash or securities is known as a?
Non-carrying firm
SIPC is a(n): A. Not-for-profit corporation B. Self-regulatory organization C. U.S. government agency D. Insurer of municipal bonds
Not-for-profit corporation The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation that was created by an act of Congress in 1970. SIPC insures a customer's account for up to $500,000 in the event of a brokerage firm's failure. SIPC is not a government-sponsored agency or a regulatory body.
Who guarantees and issues all exchange-listed option contracts?
OCC
BD employees who are involved in the investment banking and securities business are called?
Registered representatives
A corporation wants to offer its shareholders the ability to obtain shares at a fixed price. Which security should the corporation issue? A. Puts B. Preferred stock C. Futures D. Rights
Rights Rights (preemptive rights) are issued by corporations and offer existing shareholders the ability to purchase additional shares at a fixed price. Exchange-traded options (e.g., calls and puts) are not directly issued by an issuer as a means of raising capital.
Which of the following regulates the resale of restricted securities? Rule 147 Regulation D Rule 144 Rule 145
Rule 144 Rule 144 and 144A regulate the process by which restricted (unregistered) securities may be resold. Regulation D sets the regulations for raising capital through private placements. Rule 147/147A establish the requirements for intrastate offerings. Rule 145 establishes the registration requirements for the reclassification of securities.
How often do Treasury notes pay interest to investors? A. Quarterly B. Annually C. Semiannually D. At maturity
Semiannually Both Treasury notes and Treasury bonds pay interest semiannually, just like corporate and municipal bonds. However, since Treasury bills are short-term instruments, they're issued as zero-coupon bonds and don't pay interest periodically. Instead, investors who buy Treasury bills receive their interest when the T-bills mature.
A registered employee is required to disclose which of the following activities to her employing broker-dealer?
Serving as a director for a profit-based firm.
Which of the following is controlled by the Federal Reserve Board (FRB)? Interest rates on bank deposit The discount rate Insurance on deposits that are held at a financial services firm Trading regulations on U.S. government securities
The discount rate The FRB controls or sets the discount rate. The discount rate is what the FRB charges its member banks on short-term loans. Any adjustments it makes to the discount rate will influence the fed funds rate, which is the rate that member banks charge one another on overnight loans.
If a municipal bond is backed by the revenues of a facility and the income is insufficient to make the debt service payment, which of the following statements is TRUE?
The issuer will default on its next payment. A municipal bond that's backed by revenues of a project or facility is referred to as a revenue bond. When the income is insufficient to make the debt service payments (i.e., interest and/or principal payments), the issuer will default on that bond.
Which of the following statements is NOT TRUE of industrial development revenue bonds? They are issued by local municipal governments They may be used to finance the construction of commercial property that will be used by private corporations Their credit rating is determined by an analysis of the municipal government issuing the bonds Interest is paid from rents received from private corporations
Their credit rating is determined by an analysis of the municipal government issuing the bonds Industrial development revenue bonds are issued by local municipal governments to build factories or other commercial properties. The plant or property is leased by the municipality to a corporation. The interest on the bonds is paid from the lease rental payments made by the corporation. The credit rating of the bond is based on the credit rating of the corporation and not on an analysis of the credit rating of the municipal government issuing the bonds.
Which of the following statements is TRUE concerning electronic communication networks (ECNs)? They can be used only by retail investors. They can be used by investors who want to trade anonymously. They can be used only by institutional investors. They can be used by clients who don't want to use a broker-dealer.
They can be used by investors who want to trade anonymously. Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.
Which of the following securities trades in fractional units of 1/32 of a point? A. Convertible bonds B. Municipal bonds C. Treasury bonds D. Corporate bonds
Treasury bonds Corporate and municipal bonds trade in increments of 1/8 of a point, while Treasury notes and Treasury bonds trade in increments of 1/32 of a point. A convertible bond is a type of corporate bond.
Which of the following securities trades in fractional units of 1/32 of a point? A. Convertible bonds B. Municipal bonds C. Treasury bonds or D. Corporate bonds
Treasury bonds Corporate and municipal bonds trade in increments of 1/8 of a point, while Treasury notes and Treasury bonds trade in increments of 1/32 of a point. A convertible bond is a type of corporate bond.
Which bonds are considered the most liquid?
Treasury bonds Liquidity represents the ability to buy and sell a stock or bond quickly. Since the U.S. Treasury is one of the largest issuers in the world, T-Bonds are extremely liquid with a significant number of buyers and sellers. Corporate bonds and municipal bond issuers are smaller than the U.S. government and their bonds will have less liquidity.
Which of the following securities has the longest period until expiration? A. Rights B. Options C. Warrants D. Repurchase agreements
Warrants Warrants are typically created with long-term expirations; in fact, some warrants never expire (i.e., they are perpetual). On the other hand, rights are short-term and typically expire in a few weeks or months after they are issued. Exchange-traded options often have nine-month expirations. Repurchase agreements are short-term loans (often overnight).
