Unit 1 - Quiz 2

BuyStuff, Inc., common stock is listed on the NYSE. Great Plains Securities is an over-the-counter market maker and has a posted quote for BuyStuff common of 250.10-255.50. If Great Plains wants to enter a new quote, the smallest incremental change is A) $ 0.25. B) $ 0.01. C) $ 0.50. D) $ 0.05.

$0.01 This stock is quoted in increments of no less than one cent LO 1.f

For nonlisted and non-Nasdaq securities, a prospectus must be provided to all those who purchase securities as part of an APO for how many days after the effective date? A) 60 days B) 40 days C) 10 days D) 30 days

40 Days For nonlisted and non-Nasdaq securities, the prospectus delivery requirement period in the aftermarket is 40 days (90 days for an IPO). The requirement is 25 days for an IPO for a Nasdaq or exchange listed security (zero days for an APO). LO 1.b

The Big Shoe Sneaker Company is a small manufacturer of athletic shoes. It is selling $100 million of its stock. This will be its first public offering. It will use the money to enhance both marketing and production with a plan to grow the business and obtain a Nasdaq listing in two or three years. After the initial sale of the new shares, buyers of the stock in the over-the-counter market should expect to receive the final prospectus for how many days? A) Buyers in the secondary market are never entitled to the IPO prospectus B) 90 C) 40 D) 25

90 This is the initial public offering of an unlisted, non-Nasdaq, security. The requirement is that the prospectus be made available to buyers in the secondary market for 90 days after the release date. LO 1.b

Trading hours on the New York Stock Exchange are A) 9:30 am to 4:00 pm Central Time. B) 9:00 am to 4:00 pm Eastern Time. C) 9:30 am to 4:00 pm Eastern Time. D) 9:30 pm to 4:00 am Eastern Time.

9:30 am to 4:00pm Eastern Time Trading hours on the NYSE are from 9:30 am to 4:00 pm Eastern Time on business days. LO 1.d

A broker-dealer that accepts funds and securities from customers and its correspondent member firms would most likely be which of the following? A) A depository trust B) An investment company C) A fully disclosed introducing firm D) A carrying firm

A carrying firm Most firms choose to introduce their customers to another member firm known as a clearing or carrying firm to handle back-office tasks, such as clearing trades, sending trade confirmations, settlement and reporting compliance, trade execution, and custody of customer funds and securities. LO 1.e

Your customer buys 300 shares of Steel Tools common stock on Tuesday and will be an owner of record as of the close of business that same Tuesday. This must be A) a quick settlement trade. B) not possible. C) a mutual fund. D) a cash settlement trade.

A cash settlement trade This is called a cash settlement trade. It states that the trade is a common stock, so not a mutual fund. There is no formal quick settlement trade. LO 1.i

A firm that functions for the purpose of receiving and delivering payments and securities on behalf of both buyer and seller in a securities transaction is A) a depository. B) a broker-dealer. C) a clearing agent. D) a transfer agent.

A clearing agent A clearing agent is an intermediary between the buy and sell sides of a transaction that receives and delivers payments and securities on behalf of both parties. While some broker-dealers are self clearing (act as their own clearing agent), simply being a broker-dealer doesn't always include being able to provide the services of a clearing agent. LO 1.e

A company's board of directors has agreed that the company should be prepared to have shares of common stock ready to be issued that are intended to be distributed in the form of a one-time employee bonus. Not knowing exactly when the one-time bonus plan will be implemented and the shares will be needed, the type of registration or offering that would best suit the scenario is A) a bonus share plan. B) a shelf registration. C) an ESOP registration. D) a shadow registration.

A shelf registration The Securities Act of 1933 permits issuers to quickly raise money in the capital markets when needed via a shelf registration. This type of registration allows the company to, in essence, take the securities from the shelf without the delay of registering with the Securities and Exchange Commission (SEC), because the actual registration has already been done ahead of time. LO 1.b

The price an investor can sell a security is called the A) bid. B) ask. C) offer. D) POP.

Bid The bid is the price within a quote that an investor sells for. Ask and offer are the terms used for the price for purchasing a security. New issues are sold at the public offering price (POP). LO 1.f

A customer who is bullish on ABC would most likely A) buy ABC short. B) sell ABC long. C) buy ABC long. D) sell ABC short.

Buy ABC long When a customer is bullish, the customer expects the price to go up. Because trades are profitable when purchases are made at low prices and sales are made when prices are high, a customer would want to buy ABC long. Buying stock short is not a real trading strategy. LO 1.g

Your client, Randall Stephens, has been bearish on LMN stock and sold it short several months ago. He now believes the company is in a good position for a turnaround and wants to change his strategy on LMN. What should he do to implement his new strategy? A) Sell short QRS to close his existing position B) Buy to close his existing position and open a new long position in the stock C) Buy an equal number of shares to his existing short position D) Sell an equal number of shares to his existing position

Buy to close his existing position and open a new long positions in the stock Buying to close will eliminate his existing position, but if he now wants to engage in a bullish strategy on LMN, he would need to buy additional shares. LO 1.f

During the cooling-off period, underwriters may not A) distribute sales literature or advertising material. B) distribute a preliminary prospectus. C) take indications of interest. D) place a tombstone advertisement.

Distribute sales literature or advertising material During the cooling-off period, underwriters may not distribute sales or advertising literature regarding the securities to be offered. However, they may distribute a preliminary prospectus intended to gather indications of interest and place tombstone ads. LO 1.b

An opening transaction can be A) a sell only. B) a short sale only. C) either a buy or a sell. D) a buy only.

Either a buy or a sell An opening transaction can be either a buy or a sell. Which one will determine the investor's market attitude—bullish when buying to open a position and bearish when selling to open a position (selling short). LO 1.g

Regarding a shelf registration filed with the Securities and Exchange Commission (SEC), which of the following statements are true? I. A supplemental prospectus must be filed before each sale. II. This registration is for issuers who want to issue securities for the first time. III. Portions of a shelf offering can be sold over a 10-year period without having to reregister the security. IV. Portions of a shelf offering can be sold over a three-year period without having to reregister the security. A) I and IV B) II and IV C) II and III D) I and III

I and IV Shelf offerings are for issuers who already have publicly traded securities in the marketplace. This type of offering registration allows the issuers to register additional shares to be offered and then issue the securities when the need for raising capital arises—taking the securities off the shelf and selling them when needed. While portions of the issue can be sold over a three-year period, a supplemental prospectus must be filed with the SEC before each sale. LO 1.b

An investor receives a quote of 48.70—48.75 for XYZ common stock. Which of these is true? I. Purchasing the stock will cost $48.70 per share. II. Purchasing the stock will cost $48.75 per share. III. The spread is $.05. IV. The investor will receive $48.75 per share if selling. A) III and IV B) I and III C) II and III D) I and IV

II and IV Quotes are provided in bid-ask form. The first number, the bid, is the price an investor can sell a security. The second number, the ask, is the price an investor will need to pay to buy the security. The spread is the difference between these two numbers. LO 1.f

A preliminary prospectus is used to solicit A) sales after the effective date. B) indications of interest before the effective date. C) sales before the effective date. D) indications of interest before the registration filing date.

Indications of interest before the effective date A preliminary prospectus cannot be distributed before the registration date. Between the registration and effective dates, it is used to solicit or gauge indications of interest. After the effective date, sales can be solicited and a final prospectus would be available and must be used to do so. LO 1.b

Which of the following best describes a prospectus? A) It is a truth-in-lending document required whenever a loan is made to an issuer via the purchase of its debt securities. B) It is a document, required by securities law, which offers limited information about an issuer's securities to be offered to the public. C) It is a full and fair disclosure of all material information and facts regarding the issuance of securities. D) It is a useful but not mandatory document showing detailed information intended to offer investors adequate reason to purchase shares.

It is a full and fair disclosure of all material information and facts regarding the issuance of securities The Securities and Exchange Commission (SEC) requires full and fair disclosure of all material information and facts regarding the issuance of securities. This disclosure is done via a prospectus, which is required to provide investors enough information to make fully informed buying decisions. LO 1.a

Your customer notes that the amount of commission they paid your broker-dealer firm for their purchase of 100 shares of DEF, Inc., common stock is about 1% of the purchase price. On this trade your firm most likely acted in what capacity? A) On an agency basis B) As a market maker C) On a principal basis D) As an underwriter

On an agency basis When a BD is acting as a broker (agent, agency), they are assisting their customer in buying a security from a securities dealer, or selling securities to a dealer, or acting for the customer on an exchange. The BD will charge a commission for performing this service. LO 1.h

Under the Securities Act of 1933, which of the following is a nonexempt security? A) Municipal bonds B) U.S. government bonds C) Shares issued by a U.S. government bond fund D) Commercial paper

Shares issued by a US Government bond fund This is a mutual fund. Mutual funds are not exempt securities under the Securities Act of 1933. LO 1.c

Shelf offerings are covered under which if the following? A) The Trust Indenture Act of 1939 B) The Bank Secrecy Act C) The Securities Act of 1933 D) The Investment Company Act of 1940

The Securities Act of 1933 The shelf offering (registration) provision under the Securities Act of 1933 allows issuers to quickly raise capital when needed or when market conditions are favorable. LO 1.b

When an investor receives a final prospectus, the expectation should be that one of the following would not be found. Which is it? A) the Securities and Exchange Commission's (SEC's) verification of accuracy B) all known risks to purchasers of the stock C) the intended use of the proceeds raised in the offering D) the effective or offering date

The Securities and Exchange Commission's (SEC's) verification of accuracy The SEC does not verify the adequacy or accuracy of any information found in the prospectus. To the contrary, the prospectus will contain the SEC disclaimer which reads: "These securities have not been approved or disapproved by the SEC nor have any representations been made about the accuracy or the adequacy of the information." LO 1.b

The spread a dealer makes is best described as A) the ask minus the bid. B) the total commission. C) none of these. D) the ask plus the bid.

The ask minus the bid The spread is what a dealer makes as a markup when he sells from his inventory if he buys at the bid and sells at the ask. A commission is charged in an agency transaction. LO 1.f

Restricted persons are not allowed to purchase an IPO of common stock. All of the following are restricted persons except A) broker-dealers. B) the grandparent of a restricted person. C) registered representatives. D) any person owning 10% or more of a member firm.

The grandparent of a restricted person Immediate family to a restricted person is a restricted person. This includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support. Aunts and uncles as well as grandparents are not considered immediate family. If, however, one of these individuals lives in the same household as a restricted person, that individual would be a restricted person. LO 1.a

Your customer has purchased $10,000 in U. S. Treasury bonds. These securities A) are required to be delivered in the form of physical paper certificates. B) will have evidence of ownership recorded in book-entry form. C) can be transferred in either physical or book-entry form in accordance with the purchasers request. D) cannot be delivered in physical certificates because they exceed the amount for paper certificate delivery.

Will have evidence of ownership recorded in book-entry form All U.S. government securities no matter what the denomination or amount are delivered, transferred, and have ownership recorded in book-entry form. LO 1.i

During the cooling off period, underwriters would be allowed to do all of the following except A) take indications of interest. B) distribute a preliminary prospectus. C) advertise the issue. D) publish a tombstone.

advertise the issue During the cooling off period sales, solicitations and advertising are not allowed. The tombstone ad, which is more of an announcement than a solicitation, is an exception to the rule. LO 1.b

A customer enters an order that must be executed in its entirety when entered or canceled immediately. This is known as A) a fill-or-kill (FOK) order. B) an all-or-none (AON) order. C) a day order. D) an immediate or cancel (IOC) order.

fill-or-kill (FOK) order A FOK order must be canceled immediately if it cannot be filled in its entirety when entered. In this situation, there can be no partial executions. The entire order must be filled immediately, or it must be killed. An IOC order allows for partial executions, and an AON order can remain working as a good-till-canceled order if it cannot be filled immediately when entered. LO 1.g

The statement "These securities have not been approved or disapproved nor have any representations been made about the accuracy or the adequacy of the information" is A) placed by the issuer in the preliminary prospectus. B) is the disclaimer placed by the underwriters in a tombstone advertisement. C) mandated to be in the final prospectus by the Securities and Exchange Commission (SEC). D) mandated by the Financial Industry Regulatory Authority (FINRA) to be placed in both the preliminary and final prospectus.

mandated to be in the final prospectus by the Securities and Exchange Commission (SEC) Commonly known as the Securities and Exchange Commission's disclaimer, the SEC mandates that it be found in the final prospectus. LO 1.b