SIE Unit 2: Products

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days?

1 Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume (whichever is greater), every 90 days.

A registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is CORRECT?

1. 6% is the bond's coupon. 2. 6.5% is the bond's yield to maturity.

Which of the following are included in the semiannual financial reports a mutual fund must provide to its shareholders?

1. Balance sheet showing assets, liabilities, and net assets 2. Income statement detailing profit and loss for the period A mutual fund must provide 2 reports per year to shareholders: an annual audited report and a semiannual unaudited report. The reports must include among other things, the balance sheet and profit and loss statement, a list of portfolio securities as of the date of the balance sheet, compensation paid to the board of directors and advisory board, and total dollar amount of securities bought and sold during the period.

In what order would claimants receive payment in the event of a corporate bankruptcy?

1. Holders of secured debt 2. General creditors 3. Holders of subordinated debt instruments 4. Preferred stockholders

All of the following is TRUE about local government investment pools (LGIPs)

1. Pools are not required to register with the SEC 2. The pool maintains a fixed $1.00 net asset value 3. LGIPs operate similarly to a money market instrument

Which of the following are types of real estate direct participation programs?

1. Raw land 2. Existing properties 3. New construction

Which of the following are the 2 basic types of Section 529 plans, which are products used for funding higher education?

1. Savings plans 2. Prepaid tuition plans The savings plan allows the investor to accumulate money for use later in funding someone's education. The prepaid tuition plan allows the purchaser to pay the tuition for a particular K-12 or higher education institution at current rates, either in a lump sum or by periodic payments. The beneficiary of the plan then attends the institution, perhaps many years later, tuition-free. Note that ESAs are not a type of 529 plan.

Which of the following would be included in a mutual fund's list of expenses?

1. Shareholder records and service 2. Investment advisor's fee Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor.

Which of the following statements regarding real estate investment trusts are TRUE?

1. Some REITs hold no real property but hold mortgages on commercial property instead. 2. REITS can pay dividends to shareholders and make capital gains distributions.

Which of the following would cause a mutual fund's NAV per share to fall?

1. The fund pays a dividend to shareholders. 2. The market value of the portfolio declines. Paying a dividend and suffering market decline both reduce the net assets of the fund without reducing the number of shares; hence, the NAV declines. Purchasing portfolio securities simply replaces portfolio cash with an equivalent value of securities; hence the NAV remains unchanged. Redemption of shares reduces the fund's net assets, but the number of shares declines by an equivalent proportion; hence, the NAV remains unchanged.

Which of the following are TRUE regarding mutual fund sales charges?

1. They are not an expense to the fund, but to the investor. 2. They are used to compensate the fund's underwriter and sales representatives.

Identify 2 trading strategies that a hedge fund could employ in its portfolio but a mutual fund cannot.

1. Trading on margin to purchase portfolio securities 2. Selling short stocks

The Securities Act of 1933 exempts all of the following securities from registration

1. U.S. government issues 2. savings and loan issues 3. municipal issues

All of the following statements are true

1. a closed-end company may issue preferred stock 2. a bond mutual fund may not issue bonds 3. a closed-end company may issue bonds

Regarding open-end and closed-end investment companies, all of the following are true

1. both may be either diversified or nondiversified portfolios 2. both may offer numerous investment objectives to select from 3. both may avoid taxation by distributing all of their net investment income to shareholders

All of the following could be characterized as benefits to owning common stock

1. capital gains via increases in share price 2. income potential via the receipt of dividends 3. limited liability

Bonds can be issued with additional features attached, making them more attractive to investors. All of the following can be considered such features

1. convertible 2. callable 3. puttable

Obtaining the financial status of the customer, and whether or not they meet income and net worth criteria, could be required for all of the following

1. equipment leasing limited partnerships 2. oil and gas limited partnerships 3. real estate limited partnerships

The Investment Company Act of 1940 classified all the following as investment companies

1. face-amount certificates 2. management companies 3. unit investment trusts

All of the following regarding a trust set up for the purpose of holding commercial property, or mortgages on commercial property, are true

1. gains can pass through to the owners of these shares 2. these investments could not be considered open- or closed-end funds 3. ownership of these shares may provide for the receipt of dividends

Regarding oil and gas DPPs, tan¬gible drilling costs are associated with items that

1. have some salvage value at the end of the program 2. can be depreciated

All of the following are terms that can be used to describe an option contracts strike price relative to the price of the underlying stock

1. in the money 2. at the money 3. out of the money In, at, or out of the money are all terms that describe an option contracts strike price relative to the price of the underlying stock.

Partners in direct participation leasing programs can receive write-offs for all the following

1. interest expenses 2. depreciation 3. operating expenses Write-offs (deductions) associated with leasing programs are those taken for operating expenses, depreciation of the equipment owned and leased, and interest costs on the loans to purchase the equipment. Depletion, however, is a deduction associated with natural resources programs, such as oil and gas.

Money market instruments can be associated with all of the following

1. short-term debt instruments 2. highly liquid debt instruments 3. nonvolatile and safe debt instruments

The market forces that typically drive the price of a bond trading in the secondary market would include all of the following

1. supply or availability of the bond 2. interest rates 3. investors' demand for the bond

All of the following would generally be associated with a limited partnership (LP)

1. tax credits for specific programs 2. partners responsible for reporting to the IRS 3. The pass-through of gains and losses

All of the following are true of negotiable commercial paper

1. the issuers typically have strong credit ratings 2. it has a maximum 270-day maturity 3. It is considered a money market instrument

All of the following must be on the cover page or beginning of the summary prospectus of a mutual fund

1. the share class or classes offered by the fund 2. the fund share class or classes ticker symbols 3. the website where a full prospectus may be downloaded

When an issuer has equipment trust certificates outstanding,

1. title to the assets backing the certificates are held in trust 2. the assets can be repossessed and sold by the trustee When equipment trust certificates have been issued, the titles to the assets (not the actual equipment) backing the certificates are held in trust. If the issuer fails to make the payments on the equipment, it can be repossessed and sold to pay off the debt held by the certificate holders. In other words, it is the equipment acting as the collateral that secures these loans.

All of the following describe mutual funds

1. various withdrawal plans may be offered for redemption of shares 2. funds simplify tax calculations for investors by supplying Form 1099 3. the portfolio is professionally managed

All of the following are issuer transactions where the proceeds of the offering go to the issuing company

1.) a subsequent public offering (SPO) 2.) an initial public offering (IPO) 3.) an additional public offering (APO)

Yield to call (YTC) calculations reflect the early redemption date and

1.) acceleration of the discount gain if the bond was originally purchased at a discount 2.) accelerated premium loss if the bond was originally purchased at a premium

Rule 144 imposes volume limitations on the number of shares that can be sold by

1.) control persons selling registered stock held for 1 year 2.) control persons selling restricted stock held for 2 years

Common shareholders wanting to vote on issues at a shareholder meeting can do so in all of the following ways

1.) in person 2.) by proxy delivered online 3.) by proxy delivered by mail

A prospectus must be delivered to customers following a transaction in all of the following

1.) unit investment trust 2.) mutual funds 3.) follow-on offering of common stock by a public reporting company

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and was missed in the 2 previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay this customer per share first?

24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears (missed). There are $16 due in back dividends for the 2 years missed, in addition to $8 this year, for a total of $24.

An investor has asked a mutual fund company for a copy of its Statement of Additional Information (SAI). How long does the fund have to comply with the request?

3 business days from the date of the request

An investor is short a January 30 call at 5. Breakeven is

35

An affiliate holding unregistered shares can sell under Rule 144

4 times a year Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last 4 weeks' trading volume with each Form 144 filing. The filing is good for 90 days (3 months), which would allow for as many as 4 filings per year.

An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of

5.6% Current yield is determined by dividing annual interest (coupon) payment by the current market price of the bond ($50 / $900 = 5.6%). Years to maturity is not a factor in calculating current yield.

A customer purchased 1 MNO Jan 50 call at 2. What is the breakeven point for both the purchaser and the seller?

52 Whether long or short the call, the breakeven for a call is found by adding the premium to the strike price. For the call buyer, the contract is profitable above the breakeven. For a call seller, the contract stands to lose money if the price of MNO rises above breakeven.

For restricted stock (unregistered) held by a nonaffiliated, which of the following applies?

6-month holding period, with sales allowed freely thereafter

For restricted stock (unregistered) held by an affiliate (insider), which of the following applies?

6-month holding period, with volume limits thereafter

The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105-½ is approximately

7.1% A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109%, or approximately 7.1%.

A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be

A closed-end company

Corporate shareholder structure regarding liability is different from that of a partnership. In recognizing that, which of the following is TRUE?

A corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy.

An investor has entered into a contract to pay an investment company a specific sum of money in exchange for the company's agreement to pay the investor a specific (larger) sum of money on a specific date in the future. The investment company must be

A face-amount certificate company.

With money market securities held in one's portfolio, relative to other, longer-term debt securities, an investor should expect

A higher degree of safety with lower returns

Which of the following need NOT be included in the annual reports a mutual fund provides to its shareholders?

A list of the most poorly performing portfolio securities

An unsecured promissory note issued by a bank that can be traded in the secondary market is known as

A negotiable CD

Limited partnerships sold through private placements involve

A small group of investors, each contributing a large sum

During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend?

Adjustable rate

Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is TRUE?

All reduce investor returns because they reduce the amount of money available for the fund to invest.

A broker-dealer has engaged in a reverse repurchase (repo) agreement. How was this done?

An initial purchase is followed by a sale later, at a higher price.

For which of the following investors would Class C shares be most suitable?

An investor who intends to redeem the shares within a short time

Which of the following issues only common stock?

An open-end management investment company

Which of the following is a characteristic shared by both corporate debentures and income bonds?

Both must pay principal as it comes due.

An investor would expect which type of preferred stock to pay the highest stated dividend rate?

Callable

Which of the following would be unlawful regarding use of a mutual fund prospectus?

Calling an investor's attention to a section that may be interesting

Which of the following statements is TRUE regarding Exchange-traded notes?

ETNs are senior, unsecured debt securities issued by a bank or financial institution.

Which of the following securities would most likely have the lowest expense ratio?

Exchange-traded fund

The United States Congress has authorized all of the following enterprises to issue securities EXCEPT

FDIC

Under the Investment Company Act of 1940, which of the following is NOT considered and investment company?

Hedge fund

Which of the following is TRUE for mutual funds and those who invest in them?

Investors must be provided with specific information when purchasing mutual funds.

An example of securities that are established by states to provide other government entities such as cities, towns, school districts or state agencies with a short-term investment vehicle to invest funds include

Local Government Investment Pools

If a company files for bankruptcy, which of the following investors would be most likely to be paid first?

Mortgage bonds

Which of the following require voter approval?

Municipal general obligation bonds

Being secured by no physical asset and backed only by a bank's good faith and credit, a bank's promise to pay principal and interest can be evidenced in which of the following securities that are traded in the secondary market?

Negotiable certificates of deposit

For registered shares held by an affiliate (known as control stock), which of the following applies?

No holding period, but volume limits always apply Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate.

Which of the following would have no effect on the NAV per share of a mutual fund share?

Portfolio securities had to be sold for a big capital loss.

At expiration, for those who trade put options, which of the following is TRUE?

Put buyers want the contract to be in the money

What method is used to assign exercise notices to broker-dealers with short positions by Options Clearing Corporation (OCC)?

Random-selection basis

Which of the following securities are nonexempt from registration under the Securities Act of 1933?

Real estate investment trusts and corporate equity issues

Regarding corporate bond issues, which of the following statements best describes secured debt and unsecured debt?

Secured debt is asset backed, while unsecured debt is not.

Which of the following would all be considered the same regarding yields on debt instruments?

Stated, nominal, and coupon yields

Your client has a long-term investment time horizon and is willing to accept some risk to achieve a better rate of return. Of the following, which would be the least suitable recommendation?

T-bills and negotiable CDs

Which of the following would you expect to have the lowest expense ratio?

The ABC Corporate Bond Fund

Why is a fixed annuity NOT considered to be a security?

The fixed annuity buyer assumes no investment risk.

A diversified growth fund charging 0.4% of net assets per year as a 12b-1 fee may NOT make which of the following statements?

The fund is a no-load fund.

Regarding municipal general obligation (GO) bonds, which of the following is TRUE?

The lower the statutory debt limit, the safer for bondholders

What might happen if a limited partner begins making day-to-day business decisions for the partnership?

The partner might jeopardize the limited liability status held as an LP.

What limit is placed on the number of outstanding shares a mutual fund may have in the hands of investors?

There is no limit.

Which of the following is TRUE regarding no-load shares?

They have fees associated with sales and redemptions.

U.S. government deposits securities with a trustee against which certificates are sold representing principal only with no regular interest payments. These are known as

Treasury STRIPS

Which of the following are considered intangible drilling costs for an oil and gas DPP?

Wages and insurance

Which of the following is TRUE when opening an out-of-state Section 529 plan?

Withdrawals may not be free of state taxation.

An investment that allows for a share in the income, gains, losses, deductions, and tax credits of the business entity to pass through to investors is known as

a limited partnership Limited partnerships (LPs) pass through to investors (partners) a share in the income, gains, losses, deductions, and tax credits of the business entity.

By electing a board of directors (BOD), stockholders have

a say in the company's management but are not involved in the day-to-day details of its operations

When Options Clearing Corporation receives a notice to exercise, it will assign that notice to

a short broker-dealer

Hedge funds attempt to

achieve high returns and are, therefore, associated with high-risk investments While hedging is the practice of attempting to limit or mitigate risk, most hedge funds specify generating high returns as their primary investment objective. In attempting to achieve these returns, they tend to entail a substantial amount of risk for those who own shares.

While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be

adjustable rate

An option contract having no intrinsic value at expiration will likely be

allowed to expire

An income bond is

also known as an adjustment bond and is unsecured

Treasury bills

are issued at a discount without a stated interest rate

Intangible drilling costs associated with oil and gas DPPs can generally

be deducted completely in the first year of the program

The time to maturity for debt instruments

can be any length of time

Promissory notes are a form of

commercial paper issued by corporations

Common dividends may be

declared, increased, reduced, or suspended by the board of directors

A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are

equipment trust certificates

A Federal Reserve member bank's deposits in excess of the amount required to be on reserve are known as

federal funds

A convertible feature for preferred shares allows the owner to exchange the shares

for a fixed number of shares of the issuing corporation's common stock

Your customer has a portfolio consisting entirely of municipal-issued securities. Therefore, the entire portfolio would have to consist of

general obligation and revenue bonds

Tax credits for partners in a real estate program can come primarily from

government-assisted housing and historic rehabilitation properties

A limited partnership (LP)

has 2 types of partners

Direct participation programs (DPPs) are set up

having the owners of the business liable for any taxes due

A mutual fund's share class determines

how sales charges and related expenses are paid

A guaranteed bond

is debt backed by another company, such as a parent company

Mrs. Jones is an employee of a member firm and as such is a restricted person regarding the purchase of new issues. She belongs to an investment club and has a 1% interest in the club's brokerage account. The investment club

is not a restricted account and will be allowed to purchase equity shares of an IPO

The holder of an in-the-money option contract gives a "do not exercise" instruction (notice) to your broker-dealer. This notice

is used to avoid automatic exercise at expiration

An August 15 call is written at 4. The call expires without being exercised by the owner. The writer of the call

keeps the $400 received when the call was written The writer (seller) of the call would have received 4 ($400) for the contract when it was written. If the contract expires unexercised, the writer keeps the $400 premium received.

The growth potential in the price of preferred shares is generally considered to be

less than that of the issuer's common shares

An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call realized by the investor would be

less than the coupon

Common shareholders have the right to

limited access to a company's books and records

A March 25 put purchased at 1.5 has expired without being exercised. The owner of the put

loses the $150 premium paid

Secured corporate debt includes

mortgage debt

For real estate program partners, tax deductions will be derived from

mortgage interest paid and depreciation

Municipal revenue bonds are

not subject to statutory debt limits and do not require voter approval

A member firm receives an order to purchase shares in a common stock IPO from another broker-dealer for a customer. Regarding restricted persons, the member must

obtain a written representation that the buyer is not a restricted person

Section 529 plans are considered municipal fund securities. They must therefore be sold by

offering circular

Regarding CDs and negotiable CDs issued by banks

only negotiable CDs are considered money market instruments

Typically, a corporation would NOT issue

option contracts

A mutual fund has been in existence for 25 years. The prospectus must disclose the fund's performance

over the last 1, 5, and 10 years

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at

par value or higher In return for the call privilege, the corporation may pay a premium exceeding the stock's par value at the time of the call. It's reasonable that a shareholder would expect to receive at least par value or higher in the event of a call.

A shareholder owns preferred shares that allow for the possibility of receiving more than the stated dividend. This type of preferred share would be known as

participating

Real estate investment trusts (REITs)

pay dividends and pass gains through to investors but not losses

Securities acquired through some means other than a registered public offering are known as

restricted

All of the following are types of direct participation programs (DPPS) EXCEPT

retail distribution

Municipal securities can be issued by

states and local governments Municipal securities can be issued by state or local governments or by U.S. territories, authorities, and special districts.

Rule 144 stipulates that after holding restricted stock fully paid for 6 months, an affiliate may begin selling shares

subject to volume restrictions within any 90-day period

An investor holds a November 35 call that was purchased on March 3. The investor, if wanting to exercise the contract, would need to do so no later than

the 3rd Friday of November

The rate on an adjustable preferred stock would most likely be indexed to

the Treasury bill (T-bill) rate

Federal funds represent

the amount by which a bank exceeds its required deposits to be held on reserve at the FRB

Listed options can be exercised by

the holder from the time of purchase until they expire

Treasury receipts are backed by

the issuing broker-dealer

A variable annuity's investment return each month is based on

the performance of the separate account

It would be expected that a repurchase (repo) agreement contract would include

the repurchase price and the maturity date

A hedge fund portfolio has been characterized as being highly leveraged. This means that

there is substantial borrowing or purchasing on margin While hedge funds can employ all these investment types and strategies, being highly leveraged means borrowing to purchase. Borrowing to purchase securities is typically known as buying on margin.

Exempt from the penny stock rules are

unsolicited transactions

An investor has purchased Class A mutual fund shares. The NAV (net asset value) per share of the fund is the price the investor

will receive upon redemption of the shares

DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past 3 years but now is in a position to resume paying them again. Before paying common shareholders a dividend, the company would be required to pay the preferred shareholders

$4.00 While it can be paid in one annual payment, quarterly, or however the board approves it to be paid, the total in this case would be $4.00. 4% × $100 par value = $4.00.

A bond backed by a corporation's full faith and credit is

1. unsecured 2. not backed by any assets When a bond is backed by a corporation's full faith and credit, it is backed only by the reputation, credit record, and financial stability of the corporation. Not being backed by any of the corporation's assets, this bond is unsecured.

A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are TRUE?

1.) Current yield is higher than nominal yield. 2.) Nominal yield is lower than YTM.

Each of the following is defined as an investment company

1.) Fixed and nonfixed unit investment trusts (UITs) 2.) An open-end management company 3.) A closed-end management company

Which of the following regarding established customers of a broker-dealer and the purchase of penny stocks are TRUE?

1.) They are exempt from the suitability statement requirement. 2.) They are not exempt from the disclosure rules.

Negotiable jumbo CDs are characterized by all of the following

1.) they trade in the secondary market 2.) they are unsecured debt of the issuing bank 3.) they are issued in amounts of $100,000 to $1 million

Which of the following investment companies has an actively managed portfolio?

Closed-end company

Which of the following is TRUE for U.S. Treasury-issued securities?

T-bills are purchased at a discount, while T- bonds are purchased as a percentage of par.

Treasury bills pay

all interest at maturity Treasury bills (T-bills) are the only Treasury security issued at a discount to par value. At maturity, par value is received. The difference between what was paid and the par value received would be considered the interest income.

An oil and gas DDP that invests in wells that are already producing is known as

an income program

Common shareholders have the right to receive an audited set of financial statements of the company's performance

annually While a company can supply this information as often as they want to shareholders, it is only required that an audited report be received on an annual basis.

T-bonds and T-notes

are both priced as a percentage of par

Hedge funds

are nonregulated with no SEC registration required

The options disclosure document must be provided

at or before the time of account approval

An investor holding a corporate-issued mortgage bond is holding a debt security that is

backed by real estate and therefore considered secured

If a prospectus is being used to close a mutual fund sale, it must be given to the investor

before or during the sales presentation

Regarding bankruptcy proceedings,

courts protect both corporate and individual filers from creditors

An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell

immediately, subject to Rule 144 volume limitations Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144.

U.S. government securities are

issued by the U.S. Treasury in book-entry form

A statutory debt limitation imposed on a municipality restricts its authority regarding

issuing general obligation (GO) bonds

Class C mutual fund shares are also known as

level-load shares Class C mutual fund shares have no sales charge at the time of purchase, but have a percentage of their value withdrawn from the customer's account every quarter. The percentage, which can be as high as 0.75% of the value of the account, never ceases. The charge remains as long as the account does—it remains "level"—hence, the shares are known as level-load shares.

Common stockholders owning dividend paying stocks are exposed to

market risk and current income risk

An investor purchases a T-bill for $9,925 that will mature at $10,000. The difference between the $9,925 paid and the $10,000 that will be received is

the discount to par and will be considered interest received at maturity

A customer writes (sells) a call. This customer will realize the maximum gain if

the option contract expires without being exercised

An investor owns 1 November 15 put at 5. The 15 in this contract represents

the strike price, the price the investor can sell stock at