SIE Final #1

Which of the following U.S. Government securities are classified as money market instruments? [A]Treasury bills [B]Treasury notes [C]Treasury bonds [D]Treasury strips

A) A U.S. Treasury Bill is a short-term (maturities up to one year) discounted government debt security. The money market is the market for short-term debt instruments. A Treasury note has a maturity from 2 years to 10 years. A Treasury bond has a maturity up to 30 years. Treasury strips are separating the corpus and the coupons and selling each as a separate zero coupon security.

Assume that interest rates have remained stable while stock prices have been declining. An investor is most concerned about the loss of principal when investing and asks his registered representative whether a balanced fund or a growth fund would provide better preservation of capital. The RR should tell the customer that the [A]balanced fund is better because the debt securities and preferred stocks in the portfolio will provide downside protection in this scenario. [B]growth fund is better because of the greater potential for gains.[C]balanced fund is better because of the inclusion of blue chip stocks in the portfolio. [D]growth fund is better because such funds typically hold a diverse portfolio of AAA-bonds.

A) A balanced fund holds common stock, preferred stock, and bonds. It is a very conservative type of fund because of this diversification of asset classes. It typically performs better than a pure stock fund in a declining market. A growth fund is typically a pure stock fund, often comprised of small capitalization stocks.

A member firm is associated with Mr. Smith, an independent contractor of the member firm. Mr. Smith sells mutual funds from his home office. All of the following are true regarding this association EXCEPT: [A]Since Mr. Smith is an independent contractor, he will not be supervised by the firm. [B]Mr. Smith's home office must be registered as a branch office if he uses his home address in ads. [C]Mr. Smith must be registered. [D]Mr. Smith's mutual fund trades must be reviewed and approved by a Registered Principal of the member firm.

A) All choices are true except A. Mr. Smith would be under the supervision of the member firm.

One of your clients holds a preferred stock on ABC and ABC has not paid dividends for the past two quarters. ABC requires that unpaid dividends on preferred stock be paid prior to paying any dividends to common stockholders. What kind of preferred stock does your client hold? [A]Your client has a cumulative feature on their preferred stock.[B]Your client has a conversion feature on their preferred stock.[C]Your client has a participating feature on their preferred stock.[D]Your client has a call feature on their preferred stock.

A) Cumulative features require that all dividends in arrears (dividends that have not been paid) must be paid to preferred stockholders PRIOR to any payment of dividends to common stockholders.

Which of the following types of bonds secures its income from fees charged to users? [A]Revenue bond [B]General obligation bond [C]Collateral bond [D]Convertible bond

A) Municipal bonds are broken up into two separate categories: general obligation and revenue bonds. General obligation bonds are paid out of taxes levied on the taxpayers of a given area, while revenue bonds are paid for by user fees from the project. An example of a project for which a revenue bond would be issued would be a toll road.

Which of the following may NOT be purchased on margin? [A]IPOs [B]U.S. T-Bills [C]Stocks listed on a national exchange [D]Equity securities quoted on the National Market System

A) New issues may not be purchased on margin. New issues must be accompanied by a prospectus. Any security which must be accompanied by a prospectus may not be purchased on margin.

When a client opens an options account at a firm, regulations dictate that the firm must receive an account agreement signed by the customer in what time frame? [A]Following approval of the account, the firm must receive the signed account agreement within 15 days. [B]The firm must receive the signed account agreement prior to approval of the account. [C]Following approval of the account, the firm must receive the signed account agreement within one month. [D]The firm must receive the signed account agreement no fewer than 10 business days before approval of the account.

A) Options regulations at the exchange level require that the signed option account agreements be received by the firm no later than 15 days following the firm's approval of the account for options trading.

Which of the following statements about preferred stock is true? [A]Preferred stock is considered an equity security. [B]Preferred stocks have maturity dates that are fixed. [C]Generally, preferred shares come with voting privileges. [D]Most preferred stock has an equal claim to company assets as common stock in the event that a company becomes insolvent.

A) Preferred stock represents equity (ownership). Generally, they don't have voting rights or fixed maturity dates. They have a prior claim on the assets of corporation upon dissolution (company becomes insolvent or goes bankrupt).

Preferred stock has which of the following traits? [A]Preferred stockholders have a priority claim to the assets of a corporation over common shareholders in the event of dissolution of the company. [B]Dividends on preferred stock are typically paid on a monthly basis. [C]Preferred stock is issued in relation to the amount of corporate debt carried by the company. [D]Shareholders of preferred stock have the right to vote for the board of directors.

A) Preferred stockholders have a priority claim over common stockholders in the event of dissolution of the company. Dividends on preferred and on common stock are normally paid quarterly--not monthly. Preferred shareholders normally do not have voting rights and the level of debt is not correlated to the amount of preferred stock issued by the corporation.

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) 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". If the outstanding shares are being redeemed, then the asset (Cash) would decrease by the same amount as the outstanding shares. The numerator and denominator will decrease by the same amount, so there would not be a change to the NAV.

The term "spread" in the OTC market refers to the difference between the [A]bid and ask prices of a security. [B]Treasury bill yield and the yield on corporate bonds. [C]market maker's inventory in the security from the opening to the close of the trading day. [D]market price of the security and the price at which a firm would offer the security.

A) The term "spread" has different meanings in different contexts. In the OTC securities market it means the difference between the bid and ask (offer) price. For example, if a stock is bid at $50 and offered at $51, the spread is $1. The spread widens or narrows depending on supply and demand.

Which of the following investments allow a maximum contribution limit of 100% of earned income, not to exceed $6,000 (2020), assuming the investor is less than 50 years of age? [A]A Traditional IRA [B]A Keogh Plan [C]A 401(k) Plan [D]An Education IRA

A) Traditional IRAs are subject to the stated maximum contribution limits ($6,000 for 2020; same as 2019 limits). Additional catch-up contributions are only allowed for those over age 50. The contribution limit for an Education IRA is not linked to earned income. Keogh and 401(k) plans have higher contribution limits.

Which of the following is NOT a characteristic of Notes issued by the U.S. Treasury? [A]All U.S. Treasury Notes have call features. [B]Maturities on these securities are typically intermediate. [C]Quotes on these securities are listed as a percentage of the note's par value. [D]Interest is paid on these securities semi-annually.

A) U.S. Treasury Notes have intermediate term maturities in the 2-10 year range. These securities are quoted as a percentage of par and pay interest semi-annually like U.S. Treasury Bonds. T-Notes are NOT issued as callable.

A RR in California has a client in Colorado. To make trades for the Colorado client, the RR MUST: [A]Be registered in Colorado [B]Obtain the branch manager's approval [C]Keep a letter of authorization on file [D]Transfer the account to the firm's Colorado branch office

A) Under Blue Sky Laws registered representatives are required to be registered in the state(s) where their clients reside.

In order to free up time for the registered representatives, a member firm has several non-registered persons telemarket prospective clients with a script. The script states the following: "Good morning, my name is _____ and I'm calling you from Make Money Securities. Our firm expects market increases in ABC Fund, which is offered for sale by our registered representatives. May I connect you with one of our representatives or send you further information?" Which of the following is CORRECT about this situation? [A]Under no circumstances may an unregistered person perform such activities. [B]All actions are permissible except projecting the future return of the ABC Fund. [C]The non-registered persons can perform such actions provided they obtain the appropriate registration within 30 calendar days.[D]As long as registered persons are standing by to take phone calls and the non-registered persons are closely supervised, the situation is acceptable.

A) Under no circumstances may non-registered persons make sales calls to prospective clients. There are no exceptions to these rules. Also, it is prohibited to make projections on the performance of a mutual fund.

Upon the expiration of S&P index options, all options that are "in the money" will be settled by the delivery of: [A]Cash [B]U.S. Treasury bills [C]S&P 100 stocks [D]Dow Jones Industrial Average stocks

A) Index options are settled in cash (i.e. the difference between the exercise price and the current market value of the index).

When a bond is trading at a discount, the current yield on the bond is: [A]unrelated to its yield to maturity [B]less than its yield to maturity [C]equal to its yield to maturity [D]more than its yield to maturity

B On a discounted bond, current yield is always going to be less than yield to maturity (YTM) because YTM includes the value of the future cash flows from the interest payments and principal, while current yield only focuses on the current year's coupon payment and the current market price.

Which of the following provides a long-term opportunity to purchase a certain number of common shares at a specific price? [A]Standard equity options [B]Warrants [C]Rights [D]ETFs

B) In this question, the "long-term" is very important. Standard Equity Options, Warrants, and Rights all allow an investor to buy a certain number of common shares at a specific price, but the warrant is the only answer that does so on a long-term basis. Standard equity options expire in 9 months or less. Rights are typically usable for 90 days or less. Warrants are good for years, or in perpetuity. ETFs are a form of fund that does not allow an investor an opportunity to buy shares, rather the investor participates in the underlying investments of the fund and sells their ETF shares when they wish to realize gains/losses.

A broker-dealer firm has become insolvent. SIPC liquidation procedures have begun. Jill and Jack are married and each of them have individual accounts along with a joint account with each other at the firm. The following are their account balances: Jill's individual account has $275,000 in fully-paid securities Jack's individual account has $265,000 in fully-paid securities Jill and Jack's joint account has $475,000 in fully-paid securities What would SIPC cover in relation to these accounts? [A]SIPC coverage would total $500,000 for the three accounts since the two parties are married. [B]SIPC coverage would pay $275,000 for Jill's account, $265,000 for Jack's account, and $475,000 for the joint account. [C]SIPC coverage would pay $1,500,000 in this case, because each account is insured for $500,000, regardless of the amount held when the broker-dealer firm became insolvent. [D]SIPC would not cover any of these claims.

B) "SIPC provides protection on a separate customer basis, not a per account basis". A different way to say this is that SIPC provides protection on a separate customer basis by the name on the account. In this question, each account is a separate customer because they have a different name on the account. Jill's single account is one separate account, which is covered up to $500,000. Jack's account is one separate account, which is also covered up to $500,000. Their joint account involves two parties and is a separate entity/name, so it would also be covered up to $500,000.

529 Education Savings Plan accounts have all of the following features EXCEPT: [A]Beneficiaries of the 529 education savings accounts can be changed by the owner. [B]Annual contributions to the account can total no more than $2,000. [C]The owner of the account maintains control over the account.[D]As long as withdrawals are qualified, federal income tax does not apply.

B) 529 educations savings plan accounts do not have annual limitations on contributions like IRAs and Keogh plans. They are fully controlled by the owner who can change the beneficiary of the account. As well, withdrawals meeting qualification requirements are free from federal income tax.

An RR must explain sales charges to prospective mutual fund clients so that they [A]can negotiate the all sales charges and fees [B]understand breakpoint discounts and maximum charges related to buying mutual fund shares [C]aware of the SEC fees that are included in each mutual fund transaction [D]understand how the RR's commission is generated

B) A RR is required to explain sales charges to help the prospect understand the cost of buying shares in the fund at both the maximum sales charge (the Ask price) and at the reduced sales charge that the prospect may be eligible for because of a quantity purchase (breakpoints).

Which of the following BEST describes a call feature? [A]This is a feature of a bond that allows the bond to be converted to common stock at the option of the issuer. [B]A feature that allows the issuer of a bond to redeem the bond ahead of the final maturity date, typically including a premium above face value of the bond and most commonly used when interest rates have decreased. [C]This is a feature of a bond that allows the bond's coupon rate to be adjusted upward or downward in relation to interest rates in the current market. [D]A feature that forces the issuer to redeem a bond ahead of schedule at the option of the bondholder.

B) A call feature allows the issuer of a bond to redeem or call in the bond ahead of the bond's final maturity date. If bonds are called, there is typically a premium that is added to the face or par value of the bond to compensate for payout ahead of final maturity. The most common reason that a bond is called is due to a reduction in interest rates, which would allow the issuer to reduce interest costs associated with the debt. Conversion features differ from call features in that they allow the bondholder to convert their bond to common stock. Variable rate bonds can exist, where the bond's coupon rate is adjusted for interest rate fluctuations, but this feature of a bond differs significantly from a call feature. In relation to call features, issuers have control over redemption, not bondholders.

A common stockholder has all of the following rights except: [A]voting [B]demand dissolution of the company's assets [C]residual claim on the company's assets [D]to examine certain books and records

B) A common stockholder cannot demand the company to sell off its assets.

Which of the following is generally NOT TRUE in relation to Corporate Commercial Paper? [A]Commercial paper is normally offered in book-entry form.[B]Commercial paper is normally issued in callable form.[C]Commercial paper is normally sold at a discount. [D]Commercial paper is normally unsecured debt of a corporation.

B) Commercial paper represents unsecured, short-term debt of a corporation. Generally it is sold in book-entry form at a discount and redeemed at face value on a specified date. Commercial paper is NOT normally issued as callable.

Mr. Smith advises his registered representative to sell 300 shares of his ABC common stock whenever the price is right. Later that day ABC starts to move up and the RR enters a market order to sell the stock. Which of the following statements is true? [A]The RR was in violation because he did not have written discretionary authority for this customer. [B]The RR handled the order appropriately since the only decisions required were related to time and price. [C]The RR should have sought the approval of a supervisory person prior to entering the order. [D]The RR should have refused to take the order and asked the customer to call him back later in the day to see where the stock was trading.

B) Decisions as to "time and price" only DO NOT require written discretionary authority, therefore the RR handled the situation appropriately.

The appreciation of the value of a variable annuity during the accumulation period is [A]taxed as ordinary income each year. [B]tax deferred until annuitization. [C]taxed as a capital gain each year. [D]adjusts the cost basis and is taxed each year.

B) During the accumulation (pay-in) period, variable annuities are tax deferred until annuity payments to the investor begin.

The manager of Introducing Broker-Dealer wants to thank the manager at Clearing Broker-Dealer for their assistance with some increased trading volume as of late. Which of the following gifts is permissible under FINRA Rules if limited to once annually? [A]Two front-row seats to an upcoming concert, valued at $175 per seat. [B]A gift card to a local sporting goods store for exactly $100. [C]A nice, lined rain jacket embroidered with Introducing Broker-Dealer's logo, valued at $145. [D]A fly-fishing rod/reel combo for an upcoming fishing trip, valued at $450.

B) FINRA Rules permit gifts of up to $100 annually, so the gift card to the local sporting goods store is within those guidelines. Each of the other gifts exceeds the $100 limitation.

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) Generally day traders are most concerned with timing.

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) 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.

Common stockholders have all of the following rights EXCEPT: [A]attend the issuer's annual meeting [B]vote for the senior management of the company [C]Assign the right to vote for directors to another person [D]receive a pro rata share of the remaining assets upon liquidation of the company

B) Officers and senior management are selected by the Board of Directors, not the stockholders.

A customer buys U.S. Government Bonds Friday, March 6. Regular Way settlement is? [A]Friday, March 6 [B]Monday, March 9 [C]Friday, March 13 [D]Monday, March 16

B) Regular Way settlement for U. S. Government securities is the next business day after trade date.

All of the following are defensive except: [A]automobile repair service [B]tool and die manufacturer [C]natural gas supplier [D]Supermarket chain

B) Service companies, public utilities, and supermarket chains would be less subject to react to changes in the economy, making these products/services defensive. Manufacturing, such as tool and die companies are typically more cyclical and not considered defensive.

One of your clients refers a friend. After talking with the referred friend, she opens an account with you, deposits $20,000, and states that she wants you choose some stocks that will have good growth potential whenever you feel it is the right time to buy. The next step you should take would be to: [A]choose appropriate stocks, execute the orders, and report the transactions back to the new customer. [B]get written discretionary authorization from her prior to executing any transactions. [C]advise her that she needs to pick the stocks and enter the orders herself using the firm's online trading platform. [D]check with your original client to obtain his assessment of her risk tolerance prior to executing orders in the new client's account.

B) Since this client did not indicate the stocks and number of shares she wants to buy and wants the RR to make that decision the next step the RR would take would be to get written discretionary authorization from the client prior to executing any orders.

In preparation for a Secondary distribution a member firm decides to make purchases on the floor which would cause the price of the stock to rise so that the secondary distribution could be made at a higher price. Such activity is [A]allowed since anyone is allowed to enter buy orders [B]prohibited as market manipulation is not allowed [C]allowed if complete disclosure is made to the public [D]allowed if there are sufficient pre-sale orders received

B) Such activity would be considered to market manipulation and is prohibited under securities industry regulations.

Which of the following statements is FALSE when discussing the Federal Funds Rate? [A]Changes to the supply of money and demand for money cause fluctuations in the federal funds rate. [B]The Federal Reserve directly sets the Federal Funds Rate.[C]Historically, the discount rate has been lower than the Federal Funds Rate. [D]The calculation of the Federal Funds Rate takes place daily.

B) The Federal Funds Rate is set by banks that have met their reserve requirement and have excess funds which can be loaned to other banks who fall short of meeting their reserve requirements. The rate is NOT set by the FED.

Who receives an annuity contract's surrender value? [A]The beneficiary designated by the contract owner receives the surrender value. [B]The owner of the contract receives the surrender value. [C]The surrender value is forfeited back to the issuer. [D]The surrender value will be auctioned to the highest bidder.

B) The contract owner is entitled to the cash surrender value of the contract. The annuitant is entitled to the annuity payments. The beneficiary is entitled to the death benefits. The issuer (the insurance company) issues the contracts, it is not returned to the issuer. In D, the owner of the account could sell his contract to a third party. This is called a life settlement.

A client recently purchased a sizeable number of mutual fund shares and knows that the Net Asset Value will change daily. The customer asks the RR how the NAV number is computed. Which of the following best describes the computation to arrive at NAV per share? [A]NAV per share is calculated by finding the average value on a per share basis over the previous quarter. [B]NAV per share is calculated by subtracting the liabilities of the fund from the total assets of the fund, then dividing this number by the total number of shares currently outstanding. [C]NAV per share is calculated by taking the total value of the portfolio of the fund, adding sales charges received, and then dividing this figure by the total number of shares currently outstanding. [D]NAV per share is calculated by finding the total appreciation of the portfolio and dividing this figure by the total number of shares outstanding.

B) The net asset value of a fund reflects the closing value of all shares in the fund's portfolio and is calculated by taking the total assets of the fund, minus the total liabilities, divided by the total number of outstanding shares.

Eurodollars are BEST described with which of the following statements? [A]Eurodollars are the currency of a group of European countries.[B]Eurodollars represent currency of the U.S. that is currently being held in foreign (non-U.S.) banks. [C]Eurodollars represent currency of a group of European countries that are held in domestic banks (banks in the U.S.). [D]Eurodollars represent currency that may only be traded in European markets.

B) The term "Eurodollar" represents U.S. currency that is currently being held in a foreign bank (banks outside of the U.S.). Historically, Eurodollars are mostly found in European banks and are used to settle foreign transactions.

One of your clients purchases a callable corporate bond. The bond is callable at 106.55. What will the customer receive if the corporation calls the bonds and the customer tenders them back to the corporation? [A]The customer will receive $1,065.50 for the bond and accrued interest up to the call date will be subtracted from that figure. [B]The customer will receive $1,065.50 for the bond and accrued interest up to the call date will be added to that figure. [C]The customer will receive par value for the bond of $1,000 and will receive $65.50 in accrued interest. [D]The customer will receive par value for the bond of $1,000 and will receive $106.55 in accrued interest.

B) This is an example of a corporate bond being quoted as a percentage of par. The 106.55 is the equivalent of 106.55% of the par value of $1,000. This means that the bond's call value is $1,065.50 (1.0655 x 1,000) or ($10 X 106.55 = $1,065.50). The bond will be called at this call price and on top of that, the investor can expect to receive any accrued interest that would be due at the date of call on top of the call price.

One of your clients placed a trade in their cash account without the funds to pay for the securities. No additional funds were added to the account and no extension was obtained for additional time to deposit funds. The firm liquidates the purchased position. In order to comply with Reg T guidelines, the customer's account must be frozen for what amount of time? [A]The account must be frozen for 180 days. [B]The account must be frozen for 90 days. [C]The account must be frozen for 30 days. [D]The account need not be frozen.

B) Under Regulation T, when a security is purchased in an account and the funds are not available to pay for the securities at settlement, no extension has been granted, and the position has been liquidated, the account must be frozen for 90 days.

Which of the following options positions would give the investor MAXIMUM protection when hedging using options? [A]Long Calls and Short Calls [B]Long Calls and Long Puts [C]Short Calls and Short Puts [D]Short Calls and Long Puts

B) When looking for maximum protection, long calls and long puts provide the most protection because the only benefit a writer (short the option) can get is the amount of premium received when the option is written.

Which of the following are true about the purchase of variable annuities? [A]The monthly premium varies. [B]The monthly payout varies. [C]The monthly premium is voluntary. [D]The monthly payout is fixed.

B) When purchasing variable annuities the monthly pay out after annuitization varies and the monthly premium during the accumulation period is fixed.

A basis point equals: [A]1/1000 of 1% [B]1/100 of 1% [C]1/10 of 1% [D]1%

B) A basis point equals 1/100 of 1% (i.e., .01%). Thus, 100 basis points equal 1%. It is the smallest measure in quoting yields on bills, notes, and bonds. For example, if a bond's yield increased from 7% to 7.40%, it has 40 basis points.

A broker-dealer has fired a registered representative (RR) for cause related to a violation of securities regulations. This RR will continue to be subject to FINRA jurisdiction for what period of time following the filing of the Form U-5? [A]1 year [B]2 years [C]3 years [D]4 years

B) A terminated RR (or associated person) will continue to be subject to the jurisdiction of FINRA for two years after the effective date of termination of registration for any violation that occurred while still employed.

In general, which of the following is TRUE in terms of orders used to protect a profit or limit a loss? [A]Buy limits are used to protect a long stock position, while sell limits are used to protect a short stock position. [B]Buy stops are used to protect a short stock position, while sell stops are used to protect a long stock position. [C]Sell limits are used to protect a short stock position, while buy stops are used to protect a long stock position. [D]Sell stops are used to protect a long stock position, while buy limits are used to protect a short stock position.

B) In general, buy stops are used to protect a short stock position, whether that is to ensure profit or limit loss. In general, sell stops are used to protect a long stock position, whether that is to ensure profit or limit loss. Also, investors generally do not use limit orders to protect long or short stock positions.

Form letters, telemarketing scripts, and seminar texts are examples of: [A]Correspondence [B]Advertisements [C]Sales literature [D]Educational material

C) "Sales literature" is defined as marketing material where the recipients can be targeted and the firm can control who receives the materials. "Advertisements" are marketing materials where the firm cannot control who receives the information and cannot designate or specify a target audience.

Which of the following would be the MOST typical portfolio make up for a mutual fund that is categorized as "balanced"? [A]A portfolio consisting of bonds that are all investment grade [B]A portfolio consisting of municipal bonds with diversified ratings and maturities [C]A portfolio consisting of equity securities such as common and preferred, along with bonds from various issuers including government, municipal, and corporate [D]A portfolio consisting of large-cap "blue chip" equity securities

C) A Balance Mutual Fund is considered to be the most conservative and least volatile type of fund because it invests in various bond issues, preferred stocks, and common stocks.

The agreement that authorizes a broker-dealer to pledge a customer's margin securities as collateral for a loan from a bank to the broker-dealer is called: [A]A credit agreement [B]A loan consent agreement [C]A hypothecation agreement [D]A joint account agreement

C) A hypothecation agreement between a broker-dealer and a customer pledges the customer's securities to cover margin loans and authorizes the broker-dealer to pledge the same securities to a bank to collateralize a broker's loan.

When an investor in the U.S. owns an ADR (American Depositary Receipt), what does that mean? [A]It means that the investor owns U.S. bank-issued CDs (Certificates of Deposit). [B]It means that the investor has an equity position in an U.S. company, but that equity position is not tied to common stock. [C]It means that the investor holds a certificate representing ownership of a foreign company which is held by a custodian who is a third party to the ownership. [D]It means that the investor holds U.S. index fund shares.

C) ADRs (American Depositary Receipts) are certificates that represent ownership of a foreign company by a U.S. investor. The stock of the company is typically held by a third-party bank in the foreign country where the stock was issued or in another foreign country.

Which of the following statements by an RR is TRUE regarding dividends? [A]"It is possible for a long-term equity anticipation security to pay dividends." [B]"An investor can expect to receive dividends on the underlying security in the event that they own a call option." [C]"An investor who owns an American Depositary Receipt can expect to receive dividends from their investment when declared and paid." [D]"When an investor owns a warrant or right, they are entitled to receive dividends in accordance with these securities."

C) ADRs can pay dividends. Each of the other items listed do NOT pay dividends. They may have underlying securities which pay dividends, but exercise of the derivative along with ownership of the security must take place. Warrants, Rights, and options do not pay dividends.

Customers of member firms are required to receive statements of their accounts at a MINIMUM of [A]weekly. [B]monthly. [C]quarterly. [D]semi-annually.

C) FINRA Rule 2231 (previously 2340) requires that customers must receive account statements at least QUARTERLY.

Which of the following gifts would EXCEED the gift and gratuity limitations established by FINRA? [A]A registered representative, who services his mother-in-law's account, pays for an 3-day cruise for her and her husband at a cost of $2,500. [B]A branch manager of a firm who is a long-time friend of a principal at another firm pays for dinner and a concert for the two couples, where dinner totals $400 and the concert totals $250 per ticket. [C]In celebration of a clearing firm reaching 20 years in business, an introducing firm who uses the clearing firm buys Rolex watches (each valued over $2,000) for 20 executives and principals at the clearing firm. [D]To congratulate a customer on the birth of her first child, a registered representative buys the customer a $500 crib set.

C) FINRA rules dictate that no member shall give or permit to be given anything of value, including gratuities, in excess of $100 per person per year in relation to the business of the employer. The limit applies to business-related functions and gifts. For this reason, the Rolex watches would exceed the $100 limitation, even though they are tied to commemorating the 20-year anniversary of being in business. Though each of the other gifts listed exceeds the $100 limit, the gifts are provided to family, friends, or are in relation to a personal event in the life of a customer which is outside of the business relationship.

All of the following are true regarding IRA contributions EXCEPT: [A]Although a tax return is filed prior to April 15th, the IRA contribution may be delayed until April 15th. [B]Contributions may be made at any time between January 1st and April 15th of the following year. [C]If an extension for a tax return is obtained, the IRA contribution may be delayed until the date the tax return is filed. [D]Persons not participating in any other type of retirement plan may deduct their IRA contributions up to certain limits.

C) If an extension is granted for the filing of a tax return, the IRA contribution must still be made no later than April 15th.

Which of the following scenarios would NOT violate SEC rules related to trading on inside information? [A]The husband of the manager of a company's accounting department buys the company stock in his own personal account based on information discussed with his wife over dinner about unreleased financials showing significant profits for the quarter.[B]The daughter-in-law of an executive at a major corporation sells the stock of the corporation short prior to the release of news that significant cut-backs and lay-offs are approaching for the company.[C]A registered representative of a broker-dealer with inside information related to the upcoming release of a positive research report executes an unsolicited buy order from a customer. [D]A member of a company's outside counsel legal team instructs his brother to sell the company's stock short due to the expectation of a negative outcome on a pending legal matter.

C) In a scenario where a registered representative receives an unsolicited order, the registered representative is required to ensure suitability of that order for the customer and enter the order. No reason is given to suspect that the registered representative used the inside information in this scenario, so execution of the unsolicited order of a customer would not violate insider trading rules. Each of the other scenarios represents an instance of a violation of insider trading rules.

A pharmaceutical company plans to release a new drug next month. Prior to the release, one of your clients buys 1,000 shares. Two weeks prior to the release, the FDA publicly announces a delay in the approval of the drug. Your customer's shares drop approximately 20% in value. Which of the following types of risk is BEST represented by this scenario? [A]This is an example of re-investment risk. [B]This is an example of market or systematic risk. [C]This is an example of legislative or regulatory risk. [D]This is an example of unsystematic or business risk.

C) In this situation, the risk most represented would be legislative risk. Legislative risk or regulatory risk is risk which is related to changes in laws or regulations, as well as examples such as this, a delay by the FDA. The company has no control over the FDA, and thus the reduction in price of the company's stock is directly attributed to the risk assumed due to regulations and the delay by the FDA.

The filing of a SAR (Suspicious Activity Report) may be required for which TWO of the following? I. A $10,000 personal check deposited into an account annually II. A quarterly direct deposit for $7,000 into an account III. The deposit of a cashier's check once every other week for $9,000 IV. Wire transfers into and out of an account at frequent intervals [A]I & II [B]II & III [C]III & IV [D]I & IV

C) Of the choices offered the two which seem to be the MOST suspicious would be the cashier's checks just under the $10,000 limit several times a month and the wire transfers. The direct deposit and the personal check deposited once a year are not as suspicious.

An investor, Mrs. Smith, is seeking a mutual fund offering a high yield. Which of the following is the best choice for Mrs. Smith? [A]Aggressive Growth Fund [B]Hedge Fund [C]Income Fund [D]Emerging Growth Fund

C) Of the choices offered, the income fund would offer the best "yield". A Growth fund would offer more capital appreciation. Hedge Funds are not a type of mutual fund - they are in a class by themselves and are sold to institutional and accredited investors.

Regular Way Settlement for corporate securities such as common stocks, preferred stocks, and bonds is: [A]Same day as trade date [B]Trade date plus one business day [C]Trade date plus two business days [D]Trade date plus three business days

C) Regular-way settlement on corporate and municipal securities is Trade Date Plus Two Business Days (T+2). The former rule was T+3. Regulation T Settlement is T+4, formerly T+5.

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) 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.

A customer calls their RR. Which of the following statements by the customer would allow the RR to take action in effecting a transaction for the customer? [A]"I'm in the market for some of that new IPO that we discussed, so if you ever see it under $50 per share, buy 150 shares for me." [B]"I think a mutual fund of some kind would be a good addition to my portfolio. Go ahead and find one and buy it for me." [C]"When you think that the price is right today, buy 200 shares of ABC for me." [D]"I've got some shares of MNO that I'd like to get rid of some time later this month. Sell 50 shares of MNO later this month, but for nothing less than $25 per share."

C) The only instructions that would be acceptable would be the instructions that give the broker "time and price" discretion only. Time and price discretion is only good for the day the instructions are given. All of the other statements would require the client to sign over discretionary authority to the RR.

A market maker is quoting ABCD common stock, a NASDAQ security. The spread in this security is best described as the difference between [A]the dealer's cost and the sale price with the mark-up [B]the dealer's cost and the quoted bid price [C]the dealer's quoted bid and ask price [D]the highest bid and the highest ask of all market makers

C) The spread in a market maker's quote is the difference between the quoted bid and ask price published by the market maker, which is based on the current value of the stock, not the market maker's cost.

The following quote appears on a consolidated tape: XYZ P 25.13 + .25 B 25 A 25.25 How much should you expect to pay to buy 100 shares? [A]$25 per share [B]$25.13 per share [C]$25.25 per share [D]$25.38 per share

C) This is a quote from the consolidated tape. "XYZ" is the symbol for the company's security. "P" means that the last trade was on The Pacific Stock Exchange. $25.13 was the last trade price for a round lot (100 shares). That trade was .25 higher than the previous trade. "B" is the bid price of $25 and "A" is the ask price of $25.25.

Which of the following statements about REPOs (Repurchase Agreements) is FALSE? [A]Typically REPOs denominations start at a minimum of $1,000,000.[B]REPOs are considered money market instruments. [C]REPOs are often thought of as risk-free investments. [D]REPOs typically have maturities of less than three months.

C) Though REPOs have a very low level of risk, they are not considered "risk free" or "riskless" investments. All of the other statements about REPOs are true.

When a company calls an issue of bonds, all of the following would typically be FALSE EXCEPT: [A]The ratio of debt to net worth will increase. [B]The company's credit rating will be reduced. [C]The holders of called bonds will receive the face value of the bond plus a call premium. [D]The holders of called bonds will be able to reinvest and receive a higher coupon.

C) Typically when a bond is called prior to its maturity due to a call feature, the bond holders will receive a premium over the face value of the bonds as a means of compensation for the early call (e.g., A bond with a face value of 100 and a final maturity in 10 years is callable this year. The company may pay 102 or 103 on the call to compensate them for the early call).

When an investor buys a call option, regardless of whether it is an Equity or Stock Index option, the maximum risk or loss potential to the investor is the [A]premium that was paid for the contract plus any out-of-the-money amount [B]premium that was paid for the contract less the in-the-money amount [C]premium that was paid for the contract [D]exercise price on the contract plus the premium paid for the contract

C) When an investor buys an option (put or call) on a stock index or equity security, the maximum loss potential to that investor is the cost of the premium paid for the option (limited loss potential).

Which of the statements below on open-end funds is FALSE? [A]At least once annually, shareholders should receive distributions of any capital gains of the fund. [B]8.5% is the largest allowable sales charge. [C]The secondary market is where such funds are traded. [D]Some customers may qualify for breakpoints.

C) Open-end fund shares are purchased and redeemed from the fund or the funds underwriter. Open-end fund shares are NOT traded in the secondary market. According to FINRA the maximum Sales Load allowed is 8 1/2 % (even though the Investment Advisors Act of 1940 says 9% we must assume in this question that they are referring only to the FINRA Rules)!

A client has held a long position in BCD Common for several years and has seen a sizeable increase in price since initially buying the stock. The client fears that BCD is headed for a slight downturn in price and wishes to protect the profits that he holds from the previous increase. Which option strategy provides the MAXIMUM protection for this client? [A]This client would be best suited by buying calls on BCD. [B]This client would be best suited by selling calls on BCD. [C]This client would be best suited by buying puts on BCD. [D]This client would be best suited by selling puts on BCD.

C) When looking for the "maximum" or "best" protection for an existing position, one would always end up being a buyer when using options strategies. In this case, the investor fears a downturn, so this investor would want downside protection. This makes buying puts on BCD the best option strategy for protection of the profits already seen from the appreciation.

Which of the following would NOT be considered to be a Money Market Instrument? [A]Jumbo Certificates of Deposit [B]Bankers Acceptances [C]Treasury Bills [D]ADRs (American Depositary Receipts)

D) A Money Market Instrument would have a maturity of 12 months or less and includes CD's, Bankers Acceptances, Commercial Paper and Treasury Bills. American Depositary Receipts trade like common stock and do not have set maturities.

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) 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.

Which of the following accurately describes a secondary offering or secondary distribution? [A]An offering of securities that remained after an initial public offering that was not fully sold [B]A rights offering of primary shares that would take place after the completion of an initial public offering [C]Transactions that take place within an underwriting syndicate before shares are actually made available to the public [D]An offering in the secondary market of securities owned by one or more major owners wishing to sell large volumes of their shares.

D) A secondary offering or secondary distribution is the redistribution or sale of a large block of securities held by one or more major shareholders who wish to sell a large volume of shares. Large shareholders are often restricted in the amount of shares that can be sold through normal channels in the secondary market. A registered secondary offering provides the opportunity for these individuals to sell larger volumes of shares than what may be permitted through normal secondary market trades.

When an investor buys either a corporate or municipal bond, how frequently is interest paid? [A]Interest is paid every week. [B]Interest is paid every month. [C]Interest is paid on a quarterly basis. [D]Interest is paid on a semi-annual basis.

D) Interest on both corporate and municipal bonds is normally paid semi-annually. Remember it is dividend payments that are made quarterly.

When an investor regularly trades in and out of five or six different stocks daily and does not maintain any positions over night would be a: [A]Programmed Trader [B]Specialist [C]Manager [D]Pattern Day Trader

D) Pattern Day Traders do not maintain positions overnight and are in and out of stock positions daily.

A Registered Representative thoroughly reads a preliminary prospectus and then writes a brief review of the prospectus which he wants to send to clients he believes are suitable. [A]This may only be done with the Branch Office manager's approval.[B]This may be done without restriction. [C]This may only be done with the approval of a supervisory analyst.[D]This may not be done under any circumstances.

D) Preliminary prospectus' must be sent to clients without any attachment, comment or review.

Which of the following statements about Roth IRA plans is TRUE? [A]Roth IRA plans are not permitted to invest in individual stocks.[B]Maximum contributions for a single year for an individual with a Roth IRA plan would be $5,000. [C]The original owner of the plan must receive minimum distributions by the age of 70 1/2. [D]The qualified distributions of a Roth IRA plan are not taxable.

D) Qualified distributions from a Roth IRA are not taxable. Non-qualified distributions from a Roth IRA would be subject to a 10% penalty tax. In a Roth IRA, the maximum contribution for 2020 is $6,000 (same as 2019). There is an additional "catch-up" contribution of $1,000 allowed for individuals who are at least 50 years of age. Like Traditional IRAs, contributions are allowed after age 72. Minimum distributions from a ROTH IRA are NOT required by the age of 72. Investment in common stock is allowed in a Roth IRA.

SEC rule 415 allows "Shelf Registration." This permits one registration statement to cover all securities to be issued during the next: [A]Six months. [B]One year. [C]Two years. [D]Three years.

D) Rule 415 used to permit one registration statement to cover all securities to be issued during the next two years until it was amended in 2005 and the standard was set at three years.

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) SEC Rule 144A permits the sale of restricted securities to Qualified Institutional Buyers (QIBs) but not individual investors.

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) The agreement from the broker-dealer which must be signed by the client related to the terms and conditions of financing involved in a margin account would be the Credit agreement. A separate agreement called the Hypothecation Agreement discloses that securities purchased on margin may be pledged by the broker-dealer as collateral in order to finance such margin accounts. In the "real world" the Credit Agreement is normally rolled into the Margin Agreement, therefore the customer signing the Margin Agreement serves as the Credit Agreement.

What happens when an RR FAILS to complete the regulatory element of continuing education? [A]The RR will only be cut off from receiving commissions. [B]The RR only must stop prospecting and soliciting new clients.[C]The RR will automatically be terminated from their position. [D]The RR must immediately stop performing all activities which require the RR to be registered.

D) This question is tough, because you must read ALL of the answers. Answer "D" is the best answer, because it most accurately describes what must occur. The RR must stop all activities which require registration, not just one or two.

An RR is explaining a Section 529 Education Savings Plan to clients who are the parents of a college bound child. They are interested in making provisions for the college costs. The RR should disclose all of the following characteristics of a 529 Plan EXCEPT: [A]Although contributions to these plans are not tax deductible for federal income tax purposes, any annual earnings and qualified withdrawals are tax free. [B]Although these plans are not mutual funds, many offer mutual funds as investment options. [C]These plans typically charge enrollment fees, annual maintenance fees, asset management fees and sales charges for broker sold plans.[D]The maximum contribution limit can be set at more than $300,000, depending on the state and the contribution is exempt from federal gift taxes.

D) This statement is false: "The maximum contribution limit can be set at more than $300,000, depending on the state and the contribution is exempt from federal gift taxes. "Contributions to a Education Savings Plan are not exempt from federal gift taxes. However, the donor may take advantage of the annual gift tax exclusion of $15,000 per student or $30,000 for couples. Also, five years of future gift tax exclusions can be advanced into the current year, in which case the exclusion would be $75,000 for individuals or $150,000 for couples. All of the other question choices are correct and should be disclosed to the parents.

Which of the following statements is TRUE in relation to Coverdell Education Savings Accounts? [A]Contributions to a Coverdell account are not tax deductible for a donor, but all withdrawals from the account are tax free. [B]The $2,000 maximum is measured per donor per year in terms of contributions to an account beneficiary. [C]Multiple accounts can be established for a beneficiary if contributions will exceed $2,000 per year in an account. [D]Total contributions may not exceed $2,000 per beneficiary in any year, regardless of the number of donors.

D) Under IRS Rules on Coverdell Education Savings Accounts, the total contributions for an individual beneficiary of this type of account cannot be more than $2,000 in any year, no matter how many accounts have been established or how many donors exist. Contributions are not tax deductible, and withdrawals must be used for education expenses to be tax free, otherwise, earnings in the account may be taxable when withdrawn.

Which of the following is TRUE when a corporation declares a split in its common stock? [A]The corporation's working capital would be affected. [B]The corporation's retained earnings would be affected. [C]The market price of the common stock will remain unchanged.[D]The common stock's par value would be affected.

D) 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 collective 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).

Jane left the securities industry 5 years ago to raise her two children. The children are now in school full time and Jane has decided to go back to work at the same broker-dealer where she previously worked. Which of the following is true regarding Jane's registration status with the firm? [A]If Jane's firm paid the annual registration fees, Jane's license would still be valid and she could come back to work without having to take the qualification exams again, provided she kept up with the continuing education requirements of her license. [B]If Jane's firm paid the annual registration fees, Jane's license would still be valid and she could come back to work without having to take the qualification exams again but she would be required to complete the continuing education requirements to reactive her license.[C]Jane's licenses would have remained valid since she always intended to come back to work after her children went to school full time and had an agreement in place to come back to work at the firm. [D]Jane's licenses have lapsed and she will be required to take the qualification exams again.

D) When a registered person leaves a firm, a U-5 Form is filed and that person has 2 years from the date of the U-5 to reinstate their license without having to test again. Since Jane was out of the business for 5 years, she would be required to re-qualify.

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) 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.

An investor, whose investment objective is speculation, would MOSTLY be concerned with which of the following? [A]Their exposure to reinvestment risk [B]Their exposure to currency risk [C]Their exposure to interest rate risk [D]Their exposure to capital risk

D) When purchasing speculative investments, your biggest risk is going to be capital risk. Capital risk is the risk that the investor may lose all or part of the principal invested. When investing in highly speculative companies, this risk is amplified because of the business risk of the underlying company.

Mrs. Jones has a conservative investing approach. She has a large portfolio of blue chip common stocks and wants to use options to receive additional income from the portfolio. Which of the following would be the MOST suitable recommendation for Mrs. Jones? [A]Buy Puts options on the portfolio of securities [B]Write Put options on the portfolio of securities [C]Buy Call options on the portfolio of securities [D]Write Call options on the portfolio of securities

D) The investor own blue chip stock, therefore, the investor is a conservative investor. She should only be advised to write covered call options because this is the MOST conservative option out of all the four choices. The reason the sell call is covered making it the most conservative approach is because we own the underlying stocks. (The sell put is not covered because it does not say we have the cash to cover this option position.)