Chapters 1-10 Practice Exam Questions Final

A) At less than $5 per share Answer Explanation: A "penny stock" is a security typically issued by a very small company and trades for less than $5 per share Textbook Reference: Please see textbook section 1.2.2

A "penny stock" generally refers to an unlisted security that trades A) At less than $5 per share B) For $1 or less C) Less than 10 times per month D) For a few pennies

C) $100 million in assets Answer Explanation: A QIB manages at least $100 million in assets, under SEC Rule 144A. Textbook Reference: Please see textbook section 8.2.5

A Qualified Institutional Buyer (QIB), under Rule 144A, is an entity that manages at least A) $50 million in assets B) $150 million in assets C) $100 million in assets D) $10 million in assets

D) repurchase agreement Answer Explanation: Because the dealer agrees to first sell the securities and then buy them back, it is a repurchase agreement. If the dealer had agreed to first buy the securities and subsequently sell them back, it would be considered a reverse repo agreement. Textbook Reference: Please see textbook section 3.6.4

A U.S. government bond dealer sells bonds to another dealer with an agreement to buy back the securities in a specified period of time. This is a(n) A) open market note B) reverse repurchase agreement C) open market certificate D) repurchase agreement

C) the US dollar strengthens against the Canadian dollar Answer Explanation: When making investments denominated in a foreign currency, currency risk increases with the US dollar's strength or the foreign currency's weakness. Textbook Reference: Please see textbook section 7.2.10

A US investor buys shares in a Canadian company that trade in Toronto and are denominated in Canadian dollars. The currency risk of this position can rise if A) the Canadian dollar strengthens against the US dollar. B) the US dollar weakens against the Canadian dollar. C) the US dollar strengthens against the Canadian dollar. D) the Canadian dollar does not change in value against the US dollar.

D) fixed portfolio of securities assembled by a sponsor. Answer Explanation: A UIT is a fixed portfolio of assets which is assembled by a sponsor. There is no active management of the portfolio. Textbook Reference: Please see textbook section 4.4.1.1

A Unit Investment Trust (UIT) is best described as a A) managed portfolio of assets structured by a fiduciary. B) managed portfolio of assets created by a portfolio manager. C) fixed portfolio of assets created by a custodian. D) fixed portfolio of securities assembled by a sponsor

B) Assets of a company at a given point in time Answer Explanation: The balance sheet provides an overview of the assets (as well as liabilities and shareholders' equity) of a company at a given point in time, as opposed to for a given time period. As such, when analyzing a company's balance sheet, the various financial line items are "as of" a given point in time (e.g., "as of September 30, 2010"). The income statement provides the net income or "bottom line" for a company for a given time period (e.g., for the quarter, year-to-date, or year-end period). Textbook Reference: Please see textbook section 10.2.6.2

A balance sheet displays which of the following? A) Net income of a company for a given time period B) Assets of a company at a given point in time C) Net income of a company at a given point in time D) Assets of a company for a given time period

C) A deposit at a bank Answer Explanation: A BA is a short-term negotiable debt instrument issued by a borrower and guaranteed by a commercial bank. Technically, it is a time draft drawn on a deposit at a bank. Textbook Reference: Please see textbook section 3.6.3

A banker's acceptance (BA) is a time draft drawn on A) A financial intermediary counterparty B) A life insurance company C) A deposit at a bank D) Corporate assets posted as collateral

B) marketable Answer Explanation: A bond is considered "marketable" if it can be traded in the market at competitive bid-ask prices. Textbook Reference: Please see textbook section 2.1.6

A bond can be traded in the market at a competitive bid-ask price. With this feature, the bond is considered to be A) high-quality. B) marketable. C) callable. D) investment-grade

D) trading flat with unpaid coupons attached Answer Explanation: When coupons from previous interest payments are attached, the interest has not been paid. Such bonds are termed "trading flat". Textbook Reference: Please see textbook section 2.4

A bond is selling at a price of 81 with all coupons since July of 2011 attached. This bond is said to be A) Trading and interest B) Trading with recall C) Trading short D) trading flat with unpaid coupons attached

B) Will trade at a relatively low spread relative to the U.S. Treasury 10 year bond Answer Explanation: Generally speaking, the higher the risk of a bond, the higher its yield spread. A bond issued by a large well-known, and financially strong municipality will typically trade at a relatively low spread in relation to U.S. Treasuries. Spreads widen in weakening economies and narrow when the economy is strong. Textbook Reference: Please see textbook section 10.2.4

A bond issued by a well-known and highly rated municipal issue A) Will likely experience yield compression relative to the U.S. Treasury 10 year bond when the economy is weakening B) Will trade at a relatively low spread relative to the U.S. Treasury 10 year bond C) Will trade at a relatively wide spread relative to the U.S. Treasury 10 year bond D) Will likely experience a widening spread relative to the U.S. Treasury 10 year bond when the economy is growing

D) 0.0714 Answer Explanation: A bond issued at par to yield 7.5 has a coupon of 7.5% because for a bond trading at par, the NY, CY and YTM are the same. If a bond with a 7.5% coupon is trading at $105, then the current yield = $75/$1050 = 7.143%. Textbook Reference: Please see textbook section 2.2.2

A bond that was issued at par to yield 7.5% is now trading at $105. What is the bond's current yield? A) 0.0765 B) 0.075 C) 0.07 D) 0.0714

C) $1,090.00 Answer Explanation: Bonds are quoted as a percentage of par value. Therefore, a quote of 109 reflects 109% of $1,000 or $1,090. When converting a quote to a price, simply multiply the quote by 10. Textbook Reference: Please see textbook section 2.1.3

A bond with a par value of $1,000 is quoted at 109. To buy one bond at this price, an investor pays A) $991.00 B) $1,000.00 C) $1,090.00 D) $1,009.00

A) accretion of $14 Answer Explanation: Bonds purchased at a discount are accreted, meaning adjusted upwards towards par value each year. The accretion is calculated on a straight-line basis, by dividing the discount off par ($140) by the number of years to maturity (10). Assume a bond's par value is $1,000. Textbook Reference: Please see textbook section 2.5

A bond with ten years to maturity is bought at a price of $860. The annual adjustment to its cost basis will be A) accretion of $14. B) amortization of $70. C) amortization of $14. D) accretion of $70.

A) For some investors Answer Explanation: The standard of reasonable basis suitability states that a recommended security or strategy should be suitable for at least some investors. Textbook Reference: Please see textbook section 7.1.1

A broker must have a reasonable basis to make a recommendation, meaning the recommendation must be suitable A) For some investors B) For reasonable investors C) For at least a few investors D) For most investors Answer Explanation: The standard of reasonable basis suitability states that a recommended security or strategy should be suitable for at least some investors. Textbook Reference: Please see textbook section 7.1.1

B) No later than the settlement date of the transaction Answer Explanation: Municipal securities firms are prohibited from selling municipal securities to customers unless an official statement is available for delivery to the customer no later than the settlement date of the transaction. Textbook Reference: Please see textbook section 8.4.3

A buyer of a municipal security must receive the official statement from a municipal securities firm A) At the time the trade is made B) No later than the settlement date of the transaction C) Within 3 business days of the settlement date D) Within 2 business days of written request

A) LGIP Answer Explanation: Local Government Investment Pools (LGIPS) are formed by states to give local governments a money market like option for investment of excess funds. Textbook Reference: Please see textbook section 5.6.1

A city wishes to take advantage of liquidity and professional management in the investment of excess funds. An investment that is appropriate for this purpose is A) LGIP. B) BAB. C) COP. D) VRDO.

A) All of the above Answer Explanation: A company may pay a dividend in cash, stock or stock of a subsidiary company, or even goods produced by the company Textbook Reference: Please see textbook section 1.7.3

A company can declare dividends in which of the following ways? A) All of the above B) Goods produced by the company C) Cash D) Stock or stock of a subsidiary company

A) 2.4 Answer Explanation: The annual dividend in preferred stock is expressed as a percentage of par value. "8% preferred stock" would pay 8% of par value annually. 8% x $30 = $2.40 per year. Textbook Reference: Please see textbook section 1.5.1.3

A company has issued 8% preferred stock with a par value of $30 per share. The preferred stock currently is selling for $40 per share. The annual dividend paid to holders of the preferred shares will be A) 2.4 B) 3.6 C) 1.2 D) 3.2

C) exempt transaction allowing the issuer to raise capital outside the US. Answer Explanation: Regulation S is an exempt transaction allowing a company (which may be a US or foreign company) to raise capital outside the US and avoid having to register the offering in the US. Textbook Reference: Please see textbook section 8.2.2

A company may raise capital under Regulation S, which is a(n) A) private placement sold exclusively to high net worth investors. B) follow-on offering of new shares by a US company sold to US investors. C) exempt transaction allowing the issuer to raise capital outside the US. D) type of IPO sold mainly to accredited investors.

A) This transaction is permitted and complies with applicable private placement regulations. Answer Explanation: Although it is unusual for a private placement where non-accredited investors are contributing a substantial percentage of the overall capital, it is not prohibited. Mutual funds are permitted to invest in private placements. Textbook Reference: Please see textbook section 8.2.3.1

A company plans on raising $40 million in a private placement, and has targeted different classes of investors, as follows: • $10 million sold to mutual funds. • $10 million sold to hedge funds. • $20 million sold to 35 non-accredited investors. Which of the following statements regarding this transaction is correct? A) This transaction is permitted and complies with applicable private placement regulations. B) This transaction is prohibited because $20 million exceeds the maximum amount that non-accredited investors can contribute in a private placement. C) This transaction is prohibited because non-accredited investors cannot account for 50% or more of the equity in a private placement. D) This transaction is prohibited because mutual funds cannot invest in a private placement.

A) a C-Corp is a taxable entity while the S-Corp is not. Answer Explanation: An S-Corp is a type of direct participation program, with shareholders receiving a pass-through of income and losses. The entity is not taxed at the business level, but shareholders are taxed. A C-Corp does feature double taxation, with both the business and the shareholder taxable entities. Textbook Reference: Please see textbook section 5.2.1

A comparison of an S-Corp and a C-Corp will show that A) a C-Corp is a taxable entity while the S-Corp is not. B) both business structures are taxable entities, with only shareholders of an S-Corp subject to taxation. C) an S-Corp is a taxable entity while the C-Corp is not. D) neither business structure is a taxable entity, while shareholders of both entities are subject to taxation.

A) Non-systematic risk Answer Explanation: Non-systematic risk, also called business risk, is a risk specific to an individual company, rather than the market as a whole. Textbook Reference: Please see textbook section 1.3.2

A computer company develops a product which contains significant flaws, resulting in a diminished share price. This is an example of A) Non-systematic risk B) Systematic risk C) Faulty engineering D) Negative correlation

A) II and III Answer Explanation: A general partner must avoid conflicts of interest with the partnership. The general partner cannot borrow from the partnership and, if it is a real estate limited partnership, cannot compete with the partnership by purchasing or leasing adjacent property. Textbook Reference: Please see textbook section 5.2.3

A conflict of interest exists in a real estate limited partnership if the general partner I. receives compensation from the partnership II. borrows from the partnership III. owns or leases property adjacent to property of the partnership IV. is involved in more than one real estate limited partnership A) II and III B) I and II C) I and III D) III and IV

C) be less likely to make this purchase at this time. Answer Explanation: Luxury cars are examples of elastic products, whose price fluctuations will influence demand for the product. As their prices rise, consumers will be less likely to purchase these types of vehicles. As their prices fall, consumers may become more willing to make this purchase. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes. Textbook Reference: Please see textbook section 10.1.1

A consumer has been considering the purchase of a new SUV. As the price of this SUV has risen steadily over the past few months, consumers will A) consider additional features to include in their new purchase. B) investigate other high- end vehicle options prior to making a purchase. C) be less likely to make this purchase at this time. D) be more likely to purchase this vehicle at this time.

C) 0.0526 Answer Explanation: A bond's current yield is calculated by dividing the annual interest income by the current market price. $50/$950 = 5.26%.

A corporate bond that is currently trading at 95 pays a semi-annual coupon of $25. What is the current yield? A) 0.025 B) 0.0263 C) 0.0526 D) 0.05

B) will pay the investor par value plus accrued interest to that date. Answer Explanation: When an issuer calls in a bond, it will pay the bondholder the par value of the bond, plus any accrued interest to that date. Once the bond is called, there will be no further interest payments made on the bond. Textbook Reference: Please see textbook section 2.4

A corporation will call in some of its outstanding bonds. When the bonds are called, the issuer A) must make one final interest payment to the bondholder. B) will pay the investor par value plus accrued interest to that date. C) will offer the investor another bond with a lower interest rate. D) will pay the investor the current market value of the bond plus accrued interest to that date

A) Market order Answer Explanation: Market orders instruct the broker to buy or sell the options at the current market price. In this example the customer is selling, and will be writing the 20 calls at the ask price. The advantage of using market orders is that orders are filled quickly (often instantly). Because the order is not designated as an all-or-none order the order may be filled with less than 20 contracts. Textbook Reference: Please see textbook section 9.4.2

A customer has instructed his broker that he wishes to write 20 ABC 65 calls to add income and protect his portfolio. The order is to be entered immediately and he will take as many contracts as are available. This order is a A) Market order B) Sell limit order C) Buy limit order D) Stop loss all or none order

A) A prospectus Answer Explanation: The disclosure document that must be provided to investors in a UIT is a prospectus. Textbook Reference: Please see textbook section 4.4.2

A customer is interested in making an investment in a unit investment trust. The customer must receive which of the following documents for disclosure? A) A prospectus B) A private placement memorandum C) A trust indenture D) An offering circular

C) 12b-1 fees Answer Explanation: Closed-end company shares do not have 12b-1 fees. These are marketing fees incurred by the investor. Textbook Reference: Please see textbook section 4.3.2.3

A customer that purchases closed-end fund shares may pay all of the following EXCEPT A) Management Fees B) Fund expenses C) 12b-1 fees D) Commissions to a sales representative

D) reverse repurchase agreement Answer Explanation: The dealer is first buying the securities and then selling them back to the customer this is a reverse repo. If the dealer had sold them with an arrangement to purchase them back at a later date, it would be a repo. Textbook Reference: Please see textbook section 3.6.4

A dealer buying debt securities from a customer with an agreement to sell the same securities back to the same customer at a later date is taking part in a A) matched order B) repurchase agreement C) prearranged trade D) reverse repurchase agreement Answer Explanation: The dealer is first buying the securities and then selling them back to the customer this is a reverse repo. If the dealer had sold them with an arrangement to purchase them back at a later date, it would be a repo. Textbook Reference: Please see textbook section 3.6.4

C) II and III Answer Explanation: Dealers have financial risk when transacting trades for their inventory. These trades are completed as principal and compensated with a markup or markdown. Agency trades do not have financial risk, since the trade is made to fill a customer order. Agency trades are compensated by commission. Textbook Reference: Please see textbook section 9.2.1.1

A dealer purchases municipal securities for its inventory from another dealer. This transaction is I. an agency trade II. a principal trade III. compensated with a mark up IV. compensated with a commission A) I and III B) I and IV C) II and III D) II and IV

B) There is an active secondary market for closed-end funds but not for open-end funds. Answer Explanation: Closed-end funds have an active secondary market, while open-ends do not have an active secondary market. Open-end funds issue redeemable shares, which means investors purchase them directly from the fund company and sell them back directly to the fund company. Textbook Reference: Please see textbook section 4.3.2.6

A direct comparison of open-end funds and closed-end funds will show that A) Both types of funds issue a fixed number of shares or units through an IPO B) There is an active secondary market for closed-end funds but not for open-end funds. C) Open-end funds have an actively managed portfolio but closed-end funds do not. D) Both types of funds redeem their shares at the closing NAV of the business day.

D) Treasury Receipt Answer Explanation: A Treasury Receipt is essentially a zero-coupon bond structured by a broker-dealer and backed by the cash flows from Treasury securities. Textbook Reference: Please see textbook section 3.2.1.6

A discount bond issued by a broker-dealer, secured by interest and principal payments from Treasury securities, is known as a(n) A) Treasury Strip B) Income bond C) Treasury bond D) Treasury Receipt

D) File timely periodic reports with the SEC Answer Explanation: The SEC believes that the investing public needs adequate disclosure about companies that trade in public markets, such as the OTCBB. Timely periodic filings (10K, 10Q, etc.) are one way that issuers can meet this requirement. Textbook Reference: Please see textbook section 9.3.4.1

A failing company becomes delisted by Nasdaq and goes to the OTCBB. What must it do, at minimum, to remain eligible for quotes on the OTCBB?

A) offered to the public and traded on securities exchanges Answer Explanation: A master limited partnership is an investment offered to the general public and subsequently traded on securities exchanges. These investments can have hundreds of limited partners. Textbook Reference: Please see textbook section 5.2.6

A master limited partnership is an investment vehicle which is A) offered to the public and traded on securities exchanges B) sold to accredited investors through a network of broker-dealers C) a private offering of units available to high net worth investors only D) sold to the public and investors can later redeem their shares with the partnership

C) Could be a larger percentage for a small transaction than for a large transaction Answer Explanation: It is reasonable for a firm to charge a higher commission percentage for a transaction that involves extra expense or effort to complete. It is also reasonable for firms to charge a higher percentage of commission to complete transactions in thinly traded securities or for small orders. Firms must base commissions on their judgment of a security's value based on current market conditions and other factors. Textbook Reference: Please see textbook section 9.2.1.4

A fair and reasonable commission charged in an agency transaction A) Could never be higher than 5% B) Cannot be based on the dealer's judgment of the value of the securities C) Could be a larger percentage for a small transaction than for a large transaction D) Must be no higher than other agency transactions executed by the firm regardless of additional efforts to complete the trade

C) Standby Answer Explanation: A standby commitment is a type of firm commitment underwriting that applies when additional shares are issued, and current shareholders have pre-emptive rights. In this arrangement, the securities are offered to the public for a 2- to 4- week standby period. The underwriter will purchase fo r resale any of the shares that are not subscribed to during the standby period. Textbook Reference: Please see textbook section 8.3.3

A firm commitment underwriting in which shareholders with preemptive rights may maintain their proportionate ownership interest before the securities are purchased by the underwriting manager is a A) Minimum maximum B) Best efforts C) Standby D) All-or-nothing

A) A repurchase agreement Answer Explanation: A repurchase agreement occurs when securities are loaned with the agreement to buy them back, usually the next day. Textbook Reference: Please see textbook section 3.6.4

A firm has sold securities to dealers with the intention of buying back the securities at a future date. This transaction is an example of A) A repurchase agreement B) A swap C) A bankers acceptance D) A reverse repo

A) Issuer to provide additional information to investors beyond what appears in the registration statement. Answer Explanation: A free writing prospectus is used by an issuer to provide additional, updated information to investors beyond what the registration or prospects contains, with the goal being to provide investors with pertinent updates without having to amend their registration statement or prospectus. Textbook Reference: Please see textbook section 8.1.2

A free writing prospectus is used by a(n) A) Issuer to provide additional information to investors beyond what appears in the registration statement. B) Issuer or underwriter to solicit orders from the public to purchase shares in an upcoming offering. C) Managing underwriter to invite broker-dealers into a syndicate. D) Market maker to establish a quotation for a security.

A) I or IV Answer Explanation: Index funds construct their portfolios by buying and holding similar securities as the index they track. This is a common strategy for index mutual funds and ETFs. These investments then have lower management fees because of this passive management approach. Closed-end funds employ more active trading strategies. Private equity funds are organized to raise capital to invest in high growth potential business opportunities. Textbook Reference: Please see textbook section 4.5.1

A fund that holds shares of the same companies as the S&P 100 index is most likely which of the following? I. an index mutual fund II. a closed-end company fund III. private equity fund IV. an ETF A) I or IV B) II or IV C) I or III D) II or III

D) Making all investment decisions on behalf of the partnership Answer Explanation: The GP has the authority to manage the operations and investment strategy on behalf of the limited partners. The limited partners must take no role in the management or they risk the loss of their limited liability status. General partners are prohibited from borrowing money from the partnership, competing with the partnership through another investment interest, and continuing the partnership after the departure of a GP without authorization. Textbook Reference: Please see textbook section 5.2.3

A general partner in a limited partnership may engage in which of the following activities? A) Competing against the partnership through another investment B) Borrowing money from the partnership C) Continuing the partnership after the departure of a GP without authorization D) Making all investment decisions on behalf of the partnership

B) Blind pool A blind pool hedge fund permits the fund manager to make the determination of how assets will be invested. The investments that will be made are not disclosed. Textbook Reference: Please see textbook section 5.3.2

A hedge fund that does not disclose the investments it will make, giving full authority to the fund manager, is called a A) Discretionary pool B) Blind pool C) Blank check fund D) Self-directed

D) An exercise of the partnership democracy Answer Explanation: Limited partners are not permitted to play an active role in the management of the partnership. If they overstep their passive role, they risk the loss of limited liability. Responding to lawsuits and accepting new limited partners are responsibilities of general partners. Textbook Reference: Please see textbook section 5.2.3

A limited partner in a limited partnership may engage in which of the following? A) Responding to a lawsuit on behalf of the limited partnership B) The admission of additional limited partners through a review of subscription agreements C) An active operations role in the day-to-day management of the partnership D) An exercise of the partnership democracy

C) II and III Answer Explanation: Limited partners may lose their invested principal and may be responsible for their share of the recourse debt of the partnership. The general partner is responsible for lawsuits against the partnership and unlimited losses of the partnership. Textbook Reference: Please see textbook section 5.2.3

A limited partner may be liable for which of the following? I. Lawsuits against the limited partnership II. A share of recourse debt III. Losses of invested principal IV. Unlimited losses of the partnerships A) I and II B) III and IV C) II and III D) I and IV

B) 48.35 Answer Explanation: An execution at the quote means a buy order is executed at the national best offer and a sell order is executed at the national best bid. Textbook Reference: Please see textbook section 9.4.2

A market sell order is executed at the quote at a time when the bidask is $48.35-$48.37. The transaction price is A) Above $48.37 B) 48.35 C) Below $48.35 D) 48.37

A) general obligation (GO) bond Answer Explanation: GO bonds are backed by the full faith and credit, and also the taxing authority, of the issuer. This contrasts with revenue bonds, which are backed by specific revenues of the facility financed. Textbook Reference: Please see textbook section 3.4.3

A municipal bond backed by the full faith and credit, as well as the taxing authority, of the issuer is called a A) general obligation (GO) bond. B) industrial development bond. C) Build America Bond. D) revenue bond.

A) 4:15 p.m. that day Answer Explanation: Trades must be reported to the RTRS within 15 minutes of execution. Textbook Reference: Please see textbook section 9.5.3

A municipal bond is sold on Monday at 4pm. It must be reported to the Real-Time Transaction Reporting System (RTRS) by A) 4:15 p.m. that day. B) 5:00 p.m. that day. C) 4:05 p.m. that day. D) 7:30 a.m. the next morning.

B) serial bond Answer Explanation: This is an example of a serial bond structure. In this scenario, outstanding bonds are retired at different intervals with a portion of the issue maturing each year. Textbook Reference: Please see textbook section 2.1.8

A municipal bond issue is structured whereby a portion of the issue is retired each year. This is an example of a A) term bond B) serial bond C) sinking fund D) balloon bond

A) At a discount Answer Explanation: If a bond's yield to maturity is more than its coupon rate, the bond is trading at a discount. The YTM calculation reflects the impact on the investor's return of the amount of premium or discount paid when the bond is purchased. If the bond is purchased at a discount, the investor's rate of return on the bond at maturity is more than the stated rate, or coupon, of the bond when it was issued. Textbook Reference: Please see textbook section 2.2.5

A municipal bond that is offered at a yield to maturity higher than its coupon rate is recognized as trading A) At a discount B) At a premium C) flat D) At par

B) At a discount Answer Explanation: The yield to call reflects the impact on an investor's rate of return if the bond is called prior to maturity. The yield to call is higher than the coupon rate when a bond is trading at a discount because the bond holder receives the par value of the bond prior to its original maturity date if the bond is called.

A municipal bond that is quoted with a yield to call that is higher than its coupon rate is recognized as trading A) At par B) At a discount C) flat D) At a premium

A) RAN Answer Explanation: Revenue anticipation notes are typically backed by non-tax revenue. BANs are issued in anticipation of receiving long term funding from a bond issue. Grant anticipation notes are issued in anticipation of receiving federal grants. Construction loan notes are repaid when permanent financing is acquired after the project is finished. Textbook Reference: Please see textbook section 3.4.4.1

A municipal note that is typically funded by non-tax revenue is a A) RAN B) GAN C) BAN D) CLN

A) I and IV Answer Explanation: Mutual funds are defined by the Investment Company Act of 1940 as open-end investment companies because of their continuous offerings of new shares. They are subject to the requirements of the Securities Acts of 1933 and 1934, as well as the Investment Advisors Act of 1940. Textbook Reference: Please see textbook section 4.2

A mutual fund is best described as which two of the following? I. an open-end investment company II. a closed-end investment company III. a security that is exempt from the provisions of the Securities Acts of 1933 and 1934 IV. a security that is subject to the provisions of the Securities Acts of 1933 and 1934 A) I and IV B) II and IV C) II and III D) I and III

D) Selling registered securities short Answer Explanation: Mutual funds, aka open-end investment companies, may invest in all registered securities, including equities and debt. They cannot engage in short sales or borrowing money. Textbook Reference: Please see textbook section 4.2.3

A mutual fund is prohibited from engaging in which of the following activities? A) Taking long positions in high grade corporate debt B) Purchasing non-exchange listed equity securities C) Owning preferred stock of a biotech startup D) Selling registered securities short

D) 2.38% Answer Explanation: Sales charge is a percentage of the POP. To calculate, find the amount of the sales charge ($4.20 4.10 = .10) and divide it by the POP. 0.10/4.20 = 2.38%. Textbook Reference: Please see textbook section 4.2.5.2

A mutual fund share report shows a NAV of $4.10 and POP of $4.20. The sales charge percent that applies to this transaction is A) 2.44% B) 1.22% C) 1.19% D) 2.38%

C) This is a prohibited practice known as late trading Answer Explanation: This is an example of the prohibited practice of late trading. Mutual fund redemptions are to be made following the forward pricing convention, which means they are to receive the next calculated price. An information advantage may be available if forward pricing is not followed, and a number of large fines have been assessed on firms that engaged in this practice. Textbook Reference: Please see textbook section 4.2.6

A mutual fund sponsor receives a request for redemption just after market close and redeems the shares at the NAV just calculated at the close. Which of the following statement is TRUE? A) This is standard practice for the redemption of fund shares since redemption must be made on the day of request B) This is a permitted practice known as late trading C) This is a prohibited practice known as late trading D) Since the order was received after market close, the redemption should have taken place at market opening on the next business day

A) Hotel Answer Explanation: Municipal entities may use general obligation bonds to fund projects for the public good. Parks, sports complexes, golf courses, etc., that are open to the public can be funded by GOs. Hotels are not for the public good, and therefore cannot be funded by GO bonds. Textbook Reference: Please see textbook section 3.4.1

All of the following projects could be funded with general obligation municipal bonds EXCEPT A) Hotel B) Baseball field complex C) Golf Course D) Public Park

C) Money market Fund An investor who is not comfortable taking significant risk should avoid investments that may jeopardize his capital. This investor will want to focus on safe, conservative products like a money market fund. An exchangetraded note, which is an unsecured debt instrument of an issuer, may expose the investor to a greater degree of risk than he is comfortable taking. Likewise, the stock index fund and ETF are both risk assets that could lose capital and have signfiicant risk. Textbook Reference: See textbook section 7.3.1

A new 60-year-old customer is concerned with capital preservation and is uncomfortable with taking on substantial investment risk. As a result, you would be most likely to recommend which of the following investments for this customer's investment portfolio? A) Stock index Fund B) Exchange traded note (ETN) C) Money market Fund D) Exchange traded fund (ETF)

A) $5 million in group orders; $5 million in designated orders; $2 million in member orders Answer Explanation: The allocation priority is found in the syndicate letters, and usually follows the following priority: Presale, Group net, Designated, Member. Only $2 million of the member orders can be filled. Textbook Reference: Please see textbook section 8.4.1.1

A new issue of municipal bonds has an aggregate par value of $12 million. The following syndicate orders have been received: $5 million in group orders; $5 million in member orders; $5 million in designated orders. What is the allocation priority for these orders from highest to lowest? A) $5 million in group orders; $5 million in designated orders; $2 million in member orders. B) $5 million in group orders; $5 million in member orders; $2 million in designated orders. C) $5 million in member orders; $5 million in designated orders; $2 million in group orders. D) $5 million in designated orders; $5 million in member orders; $5 million in group orders

C) Between the price paid to the issuer and the price initially offered to the public. Answer Explanation: The spread is defined as the difference between the price paid to the issuer and the price at which the bonds are initially offered to the public, whether the issue is a negotiated or competitive underwriting. If a municipality receives $995 per bond from the underwriter, and the underwriter sells the bonds to customer accounts for $1,000, the spread is $5, or ó point. Textbook Reference: Please see textbook section 8.3.5

A new issue of municipal securities is coming to market through a negotiated underwriting. The spread for this issue is the difference A) In credit ratings between all rating agencies that have rated the issue. B) Between the highest and lowest coupons of the bonds offered. C) Between the price paid to the issuer and the price initially offered to the public. D) In yields between all bonds offered through the issue.

C) $5 million at the time of purchase Answer Explanation: For corporations, partnership or trusts, the threshold for qualifying as an accredited investor is $5 million in assets at the time of purchase. Textbook Reference: Please see textbook section 8.2.3

A partnership wishes to participate in a private placement as an accredited investor. To qualify, the partnership must have total assets of at least A) $10 million at the time of purchase B) $2 million at the time of purchase C) $5 million at the time of purchase D) $1 million at the time of purchase

D) might also be a penny stock Answer Explanation: Pink sheet securities are referred to as penny stocks if they trade for $5 per share or less. To become a pink sheets company, only one market maker is needed to quote the stock. Issuers do not pay a fee for listing, but market makers pay a monthly fee to quote the stock. Certain OTC equities are marginable, per guidance of the Fed. Textbook Reference: Please see textbook section 9.3.4.2

A pink sheet security is one that A) cannot be bought on margin. B) is quoted because its issuer has paid a fee for inclusion C) is represented by a minimum of three market makers D) might also be a penny stock

A) Offer price of the new issue Answer Explanation: The preliminary prospectus will typically not include the time sensitive details of the offering, such as the final offer price, as well as the total number of shares sold. These items would appear in the final prospectus. Textbook Reference: Please see textbook section 8.1.2

A preliminary prospectus is being prepared for an upcoming new corporate issue. Which of the following items will not appear in this document? A) Offer price of the new issue B) Business background of the principal officers of the business C) Statement of business policy D) Address of company headquarters

C) Rights of accumulation Answer Explanation: The rights of accumulation privilege allows mutual fund investors to receive breakpoint discounts based on purchases made at a prior time, in different accounts, by other close family members, and for purchase of other funds within the same family. For example, if a mutual fund offers a breakpoint for purchases of $25,000 or more, an investor with shares worth $20,000 could get a reduced sales charge on a $5,000 investment. Textbook Reference: Please see textbook section 4.2.5.6

A privilege that applies to mutual fund shareholders and allows them to receive sales charge discounts based on a prior purchase is A) Dollar cost averaging B) Conversion privilege C) Rights of accumulation D) A Breakpoint schedule

A) diversify broadly among many individual stocks

A proven strategy for mitigating the non-systematic risk in a portfolio is to A) diversify broadly among many individual stocks. B) purchase only blue-chip stocks. C) buy put options on a leading stock market index. D) focus on dividend-paying stocks.

D) The issuer replaces a high coupon bond with a low coupon bonds in the wake of falling interest rates. Answer Explanation: An issuer might engage in a refunding when interest rates have declined. The issuer will sell a bond with a lower coupon now that rates have fallen, and redeem the bond with the higher coupon. Textbook Reference: Please see textbook section 2.1.9

A refunding occurs when A) Interest rates have increased since the issuer's last bond offering was made. B) An investor sells his bond prior to its maturity date. C) The issuer of the bond repays the principal prior to its maturity date. D) The issuer replaces a high coupon bond with a low coupon bonds in the wake of falling interest rates.

D) achieve best execution for the customer. Answer Explanation: Breaking a large order into smaller parts is permissible to achieve best execution for the customer. Note that it would be prohibited if the primary purpose was to generate additional commissions. Textbook Reference: Please see textbook section 9.5.2

A registered representative receives a 1,000-share sell order from a customer and breaks it into three smaller orders. This is permissible if the purpose is to A) avoid the appearance of excessive shares offered. B) earn additional commissions for the representative. C) avoid having to disclose the customer's identity to the market. D) achieve best execution for the customer.

C) The overall economic benefit of owning the partnership interest, including the income and the potential for appreciation of the assets held by the partnership Answer Explanation: An interest in a limited partnership should be judged on its economic merits, not its tax benefits. Of primary importance in making a suitable recommendation of a limited partnership interest are its potential to generate income and appreciation of the assets it holds. Textbook Reference: Please see textbook section 5.2

A representative is considering the recommendation of a limited partnership interest to a customer seeking portfolio diversification. The recommendation of a partnership interest should be based on A) All of these reasons are equally important in making a suitable recommendation of a limited partnership interest B) Its ability to generate substantial tax losses to shelter income if the client is in a high tax bracket C) The overall economic benefit of owning the partnership interest, including the income and the potential for appreciation of the assets held by the partnership D) The potential for the partnership to pass through income tax credits and expense deductions to offset earnings from other successful investments

D) The overall economic benefit of owning the partnership interest, including the income and the potential for appreciation of the assets held by the partnership Answer Explanation: An interest in a limited partnership should be judged on its economic merits, not its tax benefits. Of primary importance in making a suitable recommendation of a limited partnership interest are its potential to generate income and appreciation of the assets it holds. Textbook Reference: Please see textbook section 5.2

A representative is considering the recommendation of a limited partnership interest to a customer seeking portfolio diversification. The recommendation of a partnership interest should be based on A) Its ability to generate substantial tax losses to shelter income if the client is in a high tax bracket B) All of these reasons are equally important in making a suitable recommendation of a limited partnership interest C) The potential for the partnership to pass through income tax credits and expense deductions to offset earnings from other successful investments D) The overall economic benefit of owning the partnership interest, including the income and the potential for appreciation of the assets held by the partnership

D) Commercial paper Answer Explanation: Commercial paper is a short- term debt issuance of a corporation, proceeds normally used for the capital purposes of the business. CP usually has a maximum of 270 days until maturity. Textbook Reference: Please see textbook section 3.6.1

A security that typically has up to 270 days until its maturity date is a(n) A) American Depository receipt B) Open- end investment company C) Treasury note D) Commercial paper

B) II and IV Answer Explanation: The NAV of a REIT is the per share measure of the market value of the company's assets. Shares trade on exchanges at a discount or premium based on market supply and demand. Investors will receive the market value when shares are sold. Textbook Reference: Please see textbook section 5.1.2

A share of a REIT has a current NAV of $10.00. The NAV is I. The per share market value of the company's assets as of the date of the initial public offering II. The per share measure of the market value of the company's net assets III. The price investors will receive when they sell REIT shares IV. Not necessarily the price investors will receive when they sell REIT shares A) I and IV B) II and IV C) II and III D) I and III

A) Underwriter Answer Explanation: The participants in a syndicate are known as underwriters, and the objective is for each underwriter to share the financial risk associated with offering the securities to the public. Textbook Reference: Please see textbook section 8.3

A syndicate is a group of broker-dealers working together to help an issuer raise capital. Each member of this syndicate is known as a(n) A) Underwriter B) Limited partner C) Market maker D) Mutual fund

C) Marketability Answer Explanation: Regulation S is an exempt transaction allowing a company (which may be a US or foreign company) to raise capital outside the US and avoid having to register the offering in the US. Textbook Reference: Please see textbook section 8.2.2

A troubled company is rumored to be failing. As a result, holders of its common stock are not able to find willing buyers for the stock at any price. This is an example of what type of risk? A) Systematic B) Credit C) Marketability D) Price

D) II and IV Answer Explanation: Zero coupon bonds are purchased at a discount and mature to face value. They are most suitable for investors that would like to plan for the availability of a lump sum at a defined date in the future. They do not pay interest income regularly; the interest is considered the difference between the purchase price and the par value. Textbook Reference: Please see textbook section 2.1.5

A zero coupon municipal security is most appropriate in which two of the following situations? I. A middle aged investor in a high tax bracket who is looking to generate as much tax-free income as possible II. A grandmother who would like to have a specified amount of money available to pay for her grandchild's college education in 10 years III. A retired investor who holds a diversified portfolio of growth security and wishes to receive tax free income from 20% of his portfolio IV.A head of household who is saving money to purchase a vacation home in 15 years A) I and IV B) II and III C) I and III D) II and IV

A) The Federal Reserve increases the discount rate Answer Explanation: Under monetary policy, an increase to either the reserve requirement or the discount rate will deter lending, which will result in a tightening of the money supply. A decrease in spending by the U.S. government will also reduce the amount of money, but government spending is a tool of fiscal policy. When the Fed purchases securities in the open market more money goes into circulation, so this would ease the money supply. Textbook Reference: Please see textbook section 10.3.3.3

A) The Federal Reserve increases the discount rate B) The Federal Reserve reduces the reserve requirement C) The U.S. Government decreases government spending D) The Federal Reserve purchases government securities from primary dealers

D) $4.50. Answer Explanation: Preferred stock dividends are quoted as a percentage of par value, not the market value of the shares. Therefore, it is calculated as par value multiplied by the dividend rate. $100 X 4.5% = $4.50. Textbook Reference: Please see textbook section 1.5.3

ABC Corp. issues 4.5% preferred stock with a par value of $100. If the shares are currently trading at $90, the annual dividend each share can be expected to pay is A) $4.05. B) $5.40. C) $5.00. D) $4.50.

C) 4.3% Answer Explanation: The current yield of a bond is found by dividing the annual interest by the bond's market price. In this case, we divide the annual interest, which is $40 ($20 semiannual coupon x2), by the market price of $920, to arrive at the current yield of 4.3%. Textbook Reference: Please see textbook section 2.2.2

ABC Corporate debenture is trading at $920 and pays a $20 semiannual coupon. What is the current yield of this bond? A) 2.2% B) 3.4% C) 4.3% D) 5%

D) include a detachable warrant as a sweetener with the bond offering. Answer Explanation: The inclusion of a warrant with the bond deal makes the offering more attractive to investors. The warrants can be detached later and sold in the open market or exercised for the shares of the company at a pre-set price. This would enable the issuer to sell their bond to the public at a lower interest rate than would otherwise be possible. Warrants typically have long expirations, giving investors flexibility as to how they would like to use the warrant to their best advantage. Textbook Reference: Please see textbook section 1.1.1.7

ABC Corporation is planning to do a $50,000,000 debenture offering in the next few months and hopes to make the offering as attractive as possible to investors. To achieve this goal, ABC Corporation would most likely A) structure the offering with a call feature, allowing investors to sell their bonds back to the issuer based on a specific schedule. B) market the offering to accredited investors only. C) provide a pre-emptive right with the bond offering. D) include a detachable warrant as a sweetener with the bond offering.

D) 10 business days prior to the record date Answer Explanation: The exchange must be notified 10 business days before the record date when a dividend is to be paid. Textbook Reference: Please see textbook section 1.7

ABC stock is traded on the New York Stock Exchange. If a dividend is declared by the ABC Board of Directors, the NYSE must be notified no later than A) 2 business days prior to the payable date B) 10 business days prior to the payable date C) 2 business days prior to the record date D) 10 business days prior to the record date

B) I and IV Answer Explanation: Control persons are subject to both a holding period and volume limitations on the sale of restricted stocks. Non-affiliates are subject to holding periods, but not volume limitations. Textbook Reference: Please see textbook section 8.2.4.2

According to Rule 144, which TWO of the following are TRUE of control persons and non-affiliates? I. Control persons are subject to a holding period on restricted stock. II. Control persons are not subject to a holding period on restricted stock. III. Non-affiliates are subject to volume limitations. IV. Non-affiliates are not subject to volume limitations. A) I and III B) I and IV C) II and IV D) II and III

C) Fair Answer Explanation: FINRA rules require member firms acting as a principal or dealer buy and sell securities with a fair and reasonable mark-up or mark-down, after taking into account all relevant circumstances. Likewise, when member firms act as an agent or broker they must charge fair and reasonable commissions. The general guideline is that a mark-up/mark-down or commission in excess of 5% is not reasonable. Textbook Reference: Please see textbook section 9.2.1.4

According to industry rules, broker-dealers that act as principals to buy and sell securities are required to buy and sell those securities at what prices? A) As set by FINRA B) Competitive C) Fair D) Flat

D) How much the customer can afford to pay Answer Explanation: Fair commissions and prices are based on a variety of circumstances, but do not include what the customer can afford to pay. Fair commissions and prices should be consistent for similar transactions and services. Textbook Reference: Please see textbook section 9.2.1.4

According to industry rules, member firms must charge customers fair commissions or fair prices after taking into account all of the following circumstances EXCEPT: A) The value of services the firm renders during the transaction B) The firm's transaction expenses C) Market conditions at the time of the transaction D) How much the customer can afford to pay

D) The recommendation was based on facts disclosed by the customer. Answer Explanation: The recommendations of a registered representative must be suitable for each particular client; suitability is determined based on facts disclosed by the customer. Textbook Reference: Please see textbook section 7.1.4

According to industry rules, which of the following evidence supports the suitability of an investment recommendation? A) The firm has evidence indicating that customers are satisfied with the investment. B) The recommendation was based on an evaluation of the latest research reports. C) The investment product has a history of long-term gain. D) The recommendation was based on facts disclosed by the customer.

D) last coupon date and continues to the day prior to the settlement date Answer Explanation: Accrued interest is measured from the last interest payment date (coupon date) up to but not including the settlement date of the trade. Settlement date is not included in these accrued interest computations because legal ownership of the bond changes on settlement date and this is the date from which the new owner of the bond begins earning his own interest. Textbook Reference: Please see textbook section 2.4

Accrued interest is calculated from the A) dated date and continues to the settlement date B) dated date to the next coupon date C) last coupon date and continues through the settlement date D) last coupon date and continues to the day prior to the settlement date

B) general obligation bonds Answer Explanation: Ad valorem taxes are associated with general obligation bonds. Textbook Reference: Please see textbook section 3.4.1

Ad valorem taxes are commonly associated with A) overlapping debt B) general obligation bonds C) revenue bonds D) treasury bonds

D) based on an underlying benchmark Answer Explanation: Adjustable -rate preferred stock pays dividends that are determined based on an underlying benchmark, typically the US Treasury bill. Textbook Reference: Please see textbook section 1.5.2

Adjustable-rate preferred stock pays dividends that are determined A) by the US Treasury Department B) by the registrar of the corporation C) based on the latest GDP figures D) based on an underlying benchmark

B) stabilizing Answer Explanation: Spoofing, stock pools and matched trades are all manipulative activities associated with influencing the market price of securities. Stabilization is a legal pricing support activity when used by underwriters in bringing a new issue to market. Textbook Reference: Please see textbook section 8.3.7.1

All of the following activities are defined as manipulative or fraudulent EXCEPT A) stock pools B) stabilizing C) matched trades D) spoofing

D) holder receives a higher rate of interest Answer Explanation: Note: This is an "EXCEPT" question When an investor owns a convertible bond, that bond will pay a lower rate of interest than a similar non-convertible because the investor has an opportunity to share in the upward appreciation of the underlying common stock. Textbook Reference: Please see textbook section 3.1.3

All of the following are advantages of convertible debentures EXCEPT that the A) issuer pays a lower rate of interest B) holder shares in the growth of the common stock C) holder has a fixed rate of interest D) holder receives a higher rate of interest

C) Subordinated Answer Explanation: Subordinated is a category that generally refers to debt instruments. Subordinated debt has a lower claim to assets in the event of a corporate liquidation than other forms of corporate debt. Textbook Reference: Please see textbook section 1.5.2 KnopmanMarks http://testprep.knopman.com SIE Exam - 5/24/2021 4:10 PM 10 of

All of the following are basic types of preferred stock EXCEPT A) Convertible B) Cumulative C) Subordinated D) Participating

C) The right to bind the partnership into legal contracts Answer Explanation: Limited partners cannot execute or bind contracts on behalf of the partnership. That role belongs to the general partner. Limited partners have limited liability in return for their passive role in managements. They receive a proportionate share in the losses and gains of the partnership based on the units they own. Textbook Reference: Please see textbook section 5.2.3

All of the following are characteristics of limited partners in a limited partnership EXCEPT A) Right to receive a share of losses and income from the partnership B) Limited liability C) The right to bind the partnership into legal contracts D) Passive role in management of the partnership

D) the unemployment rate Answer Explanation: Coincident indicators are economic factors that vary directly and simultaneously with the business cycle. Examples of coincident indicators are: GDP nonagricultural employment personal income consumer spending inventory/sales ratio retail sales industrial production manufacturing sales The rate of unemployment is a lagging indicator because it changes after the economy has begun a particular trend. Textbook Reference: Please see textbook section 10.1.4.3

All of the following are considered coincident economic indicators EXCEPT A) retail Sales B) personal income C) GDP D) the unemployment rate

D) Government securities Answer Explanation: Government securities settle T+1. Textbook Reference: Please see textbook section 2.4

All of the following are covered under T+2 settlement dates EXCEPT A) Corporate bonds B) Mutual funds C) Municipal securities D) Government securities

A) Redeemed by the issuer Answer Explanation: ETFs are not redeemed by the issuer. Instead, investors liquidate shares by selling them on an exchange. Textbook Reference: Please see textbook section 4.5.1

All of the following are features of ETFs EXCEPT A) Redeemed by the issuer B) Typically lower fees than closed-end company shares C) Initially capitalized through a public IPO D) Often track an index or other benchmark Answer Explanation: ETFs are not redeemed by the issuer. Instead, investors liquidate shares by selling them on an exchange. Textbook Reference: Please see textbook section 4.5.1

C) they require a written document to be signed by the customer Answer Explanation: Note: This is an EXCEPT question. When a fund offers rights of accumulation, it allows customers to combine purchases to receive a sales charge discount. The sales charge on a new purchase is determined by adding it to the total accumulated value of ownership in a mutual fund to determine the sales charge. The terms of ROA are included in the fund's prospectus, and often allow for the combination of purchases of other funds in the same family, purchases in several different accounts, and purchases between family members. A written contract is not required. Textbook Reference: Please see textbook section 4.2.5.6

All of the following are true about rights of accumulation EXCEPT A) they permit breakpoints to apply to combination purchases. B) They do not apply sales charge discounts to prior purchases. C) they require a written document to be signed by the customer. D) ROA includes share appreciation and reinvested distribution when calculating whether a breakpoint applies

C) Secondary market trading offers liquidity to investors Answer Explanation: Mutual fund shares do not trade on the secondary market. They are redeemed by the fund. There are both publicly traded, and private, but nontraded REITS. Textbook Reference: Please see textbook section 5.1.2

All of the following are true of both mutual funds and REITS EXCEPT A) A prospectus must be made available to potential purchasers B) Investors own a proportionate share of diverse assets that is professionally managed on their behalf C) Secondary market trading offers liquidity to investors D) Both have a Board of Directors to establish their strategic direction

B) Morningstar Answer Explanation: Moody's, S&P, and Fitch are well known rating services that are hired to provide credit ratings for bond issues. Morningstar is a research service but does not provide credit ratings for issues. Textbook Reference: Please see textbook section 2.3.5.2

All of the following firms provide ratings credit ratings for bonds EXCEPT A) Moody's B) Morningstar C) Fitch D) Standard & Poor's

C) Tolls collected for the use of a bridge Answer Explanation: General obligation (GO) bonds are backed by the full faith and credit of the municipality, which means its taxing authority. Taxes that back GOs include property taxes, income taxes, sales taxes, traffic fines and license fees. Tolls, concessions and lease rental payments usually back revenue bonds. Textbook Reference: Please see textbook section 3.4.1

All of the following may be used to pay the debt service on general obligation bonds EXCEPT: A) Traffic fines B) Property taxes C) Tolls collected for the use of a bridge D) Income taxes

D) A registered representative recommends that an investor make a slightly larger investment to qualify for a breakpoint Answer Explanation: Breakpoints allow investors to receive a discount on the sales charge based on the dollar amount invested. Registered representatives are required to disclose the existence of breakpoints to clients. Late trading is the prohibited practice of redeeming or purchasing shares at a price previously calculated instead of following the forward pricing rule. Market timing, or executing short term purchase and sales of mutual fund shares is also a prohibited practice. Because of their fee structures, mutual funds should be recommended as a long-term investment. Encouraging the purchase of shares just prior to a dividend distribution is called "selling dividends" and subjects the investor to a taxable event and a reduction in share value, since the NAV of fund shares falls when a dividend is distributed. Textbook Reference: Please see textbook section 4.2.6

All of the following practices are prohibited in the sales of mutual fund shares EXCEPT A) An investor is encouraged to engage in a trading strategy that involves regularly purchasing and redeeming shares within a short time frame to take advantage of share pricing inconsistencies B) A redemption request that is received today is processed at the NAV calculated at the previous day's close C) An investor is encouraged to purchase shares in a fund just before the ex-dividend date to receive the dividend distribution D) A registered representative recommends that an investor make a slightly larger investment to qualify for a breakpoint

C) If a hedge fund goes bankrupt the investors have the potential to lose more than their investment Answer Explanation: The legal structure of a hedge fund protects investors from losing more than their investment in the event of bankruptcy. They are typically established as limited partnerships or limited liability companies or offshore corporations. Textbook Reference: Please see textbook section 5.3

All of the following statements about hedge fund investments are true EXCEPT A) They are inappropriate for most retail investors B) They usually employ a high degree of leverage to magnify returns C) If a hedge fund goes bankrupt the investors have the potential to lose more than their investment D) They have highly aggressive trading strategies

D) They are subject to the debt limits of the issuer Answer Explanation: Municipal revenue bonds are issued to support long-term infrastructure projects. They offer municipalities financing flexibility because they are not subject to the debt limits or taxing authority of the issuer. Revenue bonds usually mature before the facility they fund is no longer of use. Textbook Reference: Please see textbook section 3.4.2

All of the following statements about municipal revenue bonds are true EXCEPT: A) They are considered slightly less safe than GO bonds B) The maturity of the revenue bond is usually shorter than the useful life of the facility being built C) The interest and principal is paid from user fees D) They are subject to the debt limits of the issuer

B) REITS must have a minimum of 90% of their total assets invested in real estate Answer Explanation: REITS are required to have a minimum of 75% of their asset invested in real estate and must derive at least 75% of their gross income from rents or mortgages. Except q Textbook Reference: Please see textbook section 5.1.1

All of the following statements about the structure of a REIT are true EXCEPT A) REITS must have transferable interests B) REITS must have a minimum of 90% of their total assets invested in real estate C) REITs must be jointly owned by a minimum of 100 persons D) REITS must be set up as a corporation

B) REITS must have a minimum of 90% of their total assets invested in real estate Answer Explanation: REITS are required to have a minimum of 75% of their asset invested in real estate and must derive at least 75% of their gross income from rents or mortgages. Except q Textbook Reference: Please see textbook section 5.1.1

All of the following statements about the structure of a REIT are true EXCEPT A) REITs must be jointly owned by a minimum of 100 persons B) REITS must have a minimum of 90% of their total assets invested in real estate C) REITS must have transferable interests D) REITS must be set up as a corporation

D) REITS must have a minimum of 90% of their total assets invested in real estate Answer Explanation: REITS are required to have a minimum of 75% of their asset invested in real estate and must derive at least 75% of their gross income from rents or mortgages. Except q Textbook Reference: Please see textbook section 5.1.1

All of the following statements about the structure of a REIT are true EXCEPT A) REITs must be jointly owned by a minimum of 100 persons B) REITS must have transferable interests C) REITS must be set up as a corporation D) REITS must have a minimum of 90% of their total assets invested in real estate

All of the following statements about the structure of a REIT are true EXCEPT A) REITs must be jointly owned by a minimum of 100 persons B) REITS must have transferable interests C) REITS must have a minimum of 90% of their total assets invested in real estate D) REITS must be set up as a corporatio Answer Explanation: REITS are required to have a minimum of 75% of their asset invested in real estate and must derive at least 75% of their gross income from rents or mortgages. Except q Textbook Reference: Please see textbook section 5.1.1

All of the following statements about the structure of a REIT are true EXCEPT A) REITs must be jointly owned by a minimum of 100 persons B) REITS must have transferable interests C) REITS must have a minimum of 90% of their total assets invested in real estate D) REITS must be set up as a corporatio

A) The tax that must be paid is the lower of the AMT or normal income tax calculation Answer Explanation: The alternative minimum tax (AMT) was designed to insure that persons with numerous tax deductions or credits pay a fair amount of income tax. A separate AMT calculation is made and the tax owed based on the greater of the two calculations must be paid. Private activity bonds are included in the AMT calculation. Confirmations include a notation to inform investors of bonds that may be subject to AMT. Textbook Reference: Please see textbook section 3.4.5.3

All of the following statements apply to Alternative Minimum Taxes (AMT) and municipal bonds EXCEPT A) The tax that must be paid is the lower of the AMT or normal income tax calculation B) Interest from private activity bonds must be included in the calculation C) The AMT must be calculated separately and compared to the normal tax calculation D) Bond confirmations will identify if AMT applies to the issue

D) New issues of Treasury securities can be sold only after the SEC has received their registration statement Answer Explanation: U.S. government securities are exempt from registration statement and prospectus requirements required by the Securities Act of 1933. New issues of Treasury securities are sold through auctions conducted by the Federal Reserve Board. The rates of newly issued T-bills are often used to establish interest rates for variable rate securities and mortgage loans. Textbook Reference: Please see textbook section 3.2

All of the following statements are true about newly issued U.S. government securities EXCEPT A) Variable rate securities and mortgage loans are frequently tied to yields of newly issued T-bills. B) All new issues of Treasury securities are sold through auctions. C) New Treasury securities are issued by the Federal Reserve Board D) New issues of Treasury securities can be sold only after the SEC has received their registration statement

D) When new shares are necessary, they are frequently issued through shelf offerings Answer Explanation: Closed-end companies raise additional capital through rights offerings or reinvestment of certain dividend distributions. Their capital and number of shares outstanding are fixed. Textbook Reference: Please see textbook section 4.6 KnopmanMarks http://testprep.knopman.com SIE Exam - 5/26/2021 12:35 AM 1 of

All of the following statements are true about the capitalization of closed-end companies EXCEPT A) New shares are not continually issued B) They raise capital through a public IPO C) The amount of capital they manage is considered fixed D) When new shares are necessary, they are frequently issued through shelf offerings

C) the stockholder must surrender the preferred when called or lose the right to par value Answer Explanation: The advantage of convertible preferred stock is the opportunity to participate in any appreciation in the value of the common stock. In return for this potential benefit, the preferred pays a lower rate than nonconvertible preferred. Stockholders are always required to surrender the stock when it is called, but they will usually be paid a premium over par value. Additionally, dividends cease on the call date. Note that this is an "except" question. Textbook Reference: See textbook section 1.5.2

All of the following statements are true of a callable convertible preferred issue EXCEPT that A) dividend payments stop after the preferred is called B) the convertible is issued with a lower stated dividend rate than a nonconvertible preferred C) the stockholder must surrender the preferred when called or lose the right to par value D) the convertible preferred can increase in price because of the underlying security

B) the stockholder must surrender the preferred when called or lose the right to par value Answer Explanation: The advantage of convertible preferred stock is the opportunity to participate in any appreciation in the value of the common stock. In return for this potential benefit, the preferred pays a lower rate than nonconvertible preferred. Stockholders are always required to surrender the stock when it is called, but they will usually be paid a premium over par value. Additionally, dividends cease on the call date. Note that this is an "except" question. Textbook Reference: See textbook section 1.5.2

All of the following statements are true of a callable convertible preferred issue EXCEPT that A) the convertible preferred can increase in price because of the underlying security B) the stockholder must surrender the preferred when called or lose the right to par value C) dividend payments stop after the preferred is called D) the convertible is issued with a lower stated dividend rate than a nonconvertible preferred

B) the stockholder must surrender the preferred when called or lose the right to par value Answer Explanation: The advantage of convertible preferred stock is the opportunity to participate in any appreciation in the value of the common stock. In return for this potential benefit, the preferred pays a lower rate than nonconvertible preferred. Stockholders are always required to surrender the stock when it is called, but they will usually be paid a premium over par value. Additionally, dividends cease on the call date. Note that this is an "except" question. Textbook Reference: See textbook section 1.5.2

All of the following statements are true of a callable convertible preferred issue EXCEPT that A) the convertible preferred can increase in price because of the underlying security B) the stockholder must surrender the preferred when called or lose the right to par value C) the convertible is issued with a lower stated dividend rate than a nonconvertible preferred D) dividend payments stop after the preferred is called

Answer Explanation: The advantage of convertible preferred stock is the opportunity to participate in any appreciation in the value of the common stock. In return for this potential benefit, the preferred pays a lower rate than nonconvertible preferred. Stockholders are always required to surrender the stock when it is called, but they will usually be paid a premium over par value. Additionally, dividends cease on the call date. Note that this is an "except" question. Textbook Reference: See textbook section 1.5.2

All of the following statements are true of a callable convertible preferred issue EXCEPT that A) the stockholder must surrender the preferred when called or lose the right to par value B) the convertible is issued with a lower stated dividend rate than a nonconvertible preferred C) the convertible preferred can increase in price because of the underlying security D) dividend payments stop after the preferred is called

B) Issuers choose to call bonds when current interest rates are higher than the coupon rate of the bond Answer Explanation: Issuers call bonds when current interest rates have fallen below the coupon they must pay on outstanding bonds. The concept is much like refinancing a mortgage at a lower interest rate. Bonds issued by the federal government are not callable. Issuers pay a higher rate on callable bonds to compensate for the risk that when they are called, investors may not be able to invest their funds at rates as high as those of the called bonds. Interest is no longer paid on bonds that have been called. Textbook Reference: Please see textbook section 2.1.9

All of the following statements are true regarding callable bonds EXCEPT A) Issuers no longer pay interest on bonds that have been called B) Issuers choose to call bonds when current interest rates are higher than the coupon rate of the bond C) Corporate bonds are often callable, but government bonds typically are not D) Corporate callable bonds usually have a higher coupon rate than non-callable bonds

C) $0 Answer Explanation: The ZR in the quote indicates that this bond is a zero, it does not make semi-annual interest payments. Zero's sell at a deep discount and mature at par. The difference between the purchase price and the cash received at maturity is interest income. Textbook Reference: Please see textbook section 2.1.5

An investor purchasing 2 GMAC ZR 12's at 53 1/2 would receive annual interest of A) $12 B) $120 C) $0 D) $53.50

A) A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus Answer Explanation: Mutual fund companies must provide investor disclosure as required under the Securities Act of 1933. All investors must receive a prospectus, but they may receive a summary prospectus instead of the long and highly detailed statutory prospectus. If provided the summary prospectus, the full statutory prospectus must be available in written or electronic form for customer review. Summary prospectuses must seven key items to make it easy for investors to compare funds. Textbook Reference: Please see textbook section 4.2.1

All of the following statements are true regarding mutual fund disclosure EXCEPT A) A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus B) A summary prospectus must include seven key items to make it easy for investors to compare information between mutual funds C) All investors that purchase mutual funds have access to a full statutory prospectus either in print or online D) Mutual fund companies must comply with registration and disclosure requirements of Securities Act of 1933

A) A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus Answer Explanation: Mutual fund companies must provide investor disclosure as required under the Securities Act of 1933. All investors must receive a prospectus, but they may receive a summary prospectus instead of the long and highly detailed statutory prospectus. If provided the summary prospectus, the full statutory prospectus must be available in written or electronic form for customer review. Summary prospectuses must seven key items to make it easy for investors to compare funds. Textbook Reference: Please see textbook section 4.2.1

All of the following statements are true regarding mutual fund disclosure EXCEPT A) A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus B) All investors that purchase mutual funds have access to a full statutory prospectus either in print or online C) A summary prospectus must include seven key items to make it easy for investors to compare information between mutual funds D) Mutual fund companies must comply with registration and disclosure requirements of Securities Act of 1933

D) A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus Answer Explanation: Mutual fund companies must provide investor disclosure as required under the Securities Act of 1933. All investors must receive a prospectus, but they may receive a summary prospectus instead of the long and highly detailed statutory prospectus. If provided the summary prospectus, the full statutory prospectus must be available in written or electronic form for customer review. Summary prospectuses must seven key items to make it easy for investors to compare funds. Textbook Reference: Please see textbook section 4.2.1

All of the following statements are true regarding mutual fund disclosure EXCEPT A) All investors that purchase mutual funds have access to a full statutory prospectus either in print or online B) A summary prospectus must include seven key items to make it easy for investors to compare information between mutual funds C) Mutual fund companies must comply with registration and disclosure requirements of Securities Act of 1933 D) A summary prospectus may be provided to customers only if they have already received the fund's full statutory prospectus

B) They are sold to public, accredited and institutional investors Answer Explanation: Because they are exempt from disclosure requirements under the Securities Act of 1933, private REITs (aka private placement REITs) cannot be traded publically. Textbook Reference: Please see textbook section 5.1.3

All of the following statements are true regarding private REITS EXCEPT A) They lack liquidity B) They are sold to public, accredited and institutional investors C) They are exempt from many disclosure requirements under the Securities Act of 1933 D) They do not trade in the public markets

D) The minimum price of stock included in the Pink Sheets is $1.00 per share Answer Explanation: Companies that trade on the Pink Sheets are not subject to initial listing requirements, and do not have to file financial reports with the SEC or other regulators. There is no minimum share price for Pink Sheet stocks. Pink Sheet stocks often trade infrequently and therefore have higher spreads between the bid and ask price. Textbook Reference: Please see textbook section 9.3.4.2

All of the following statements are true regarding securities that are quoted on the Pink Sheets EXCEPT A) The issuer is not subject to initial Pink Sheet listing requirements B) The issuing companies are not required to file annual and quarterly reports with the SEC or other insurance or financial regulator C) Most of these securities trade relatively infrequently and have a high bid/ask spread D) The minimum price of stock included in the Pink Sheets is $1.00 per share

D) Units are usually purchased directly from the trust without a registered representative Answer Explanation: UIT units are generally distributed through a registered representative of a broker dealer. Investors must usually meet a minimum investment amount when investing in a UIT. UITs are typically packaged in standard amounts, for example, $10 per unit. UITs must be sold with a prospectus. Textbook Reference: Please see textbook section 4.4.2

All of the following statements are true regarding the sale of unit investment trust units EXCEPT A) There is usually a minimum purchase amount specified B) Units are packaged and purchased in standard amounts C) Potential purchasers must receive a prospectus D) Units are usually purchased directly from the trust without a registered representative

C) Prices are quoted in 1/8ths Answer Explanation: Prices of U.S. Treasury securities are quoted in 32nds. Treasury Bills are quoted at a discount from their face value, while notes and bonds are quoted with a bid/ask. The customer buys at the ask price which is always higher than the bid. A narrow bid/ask price indicates a very active trading market. Textbook Reference: Please see textbook section 3.2.3

All of the following statements correctly describe quotations of U.S. Treasury Securities EXCEPT A) A very small bid ask spread indicates highly active trading of the security B) Treasury Bills are quoted at a discount from their face value. C) Prices are quoted in 1/8ths D) Ask prices are always higher than bid prices for notes and bonds.

D) They are bought or sold at the price next calculated Answer Explanation: Closed-end company shares trade at their market price on exchanges. Open end company shares are bought or sold at the price next calculated. Textbook Reference: Please see textbook section 4.3.2.6

All of the following statements regarding closed-end company shares are true EXCEPT A) The number of shares outstanding is fixed B) A single share class is issued C) They may be purchased on margin D) They are bought or sold at the price next calculated

B) They usually do not charge 12b-1 fees Answer Explanation: A-share normally charge front-end sales charges that are paid at the time of the initial purchases. 12b-1 fees are in addition to these sales charges. A-shares make sense for persons who plan to hold their shares for a long period of time. Breakpoints are often applied to large purchases of Ashares. Textbook Reference: Please see textbook section 4.2.5.2

All of the following statements regarding mutual fund A- shares are true EXCEPT A) The sales charge for A-share funds is often discounted for large purchases B) They usually do not charge 12b-1 fees C) They charge up-front sales charges, paid fully at the time of the initial purchase D) They are often cost effective for persons who hold their shares for a long period of time

B) The breakpoint schedule applies to fund purchases in different fund families Answer Explanation: A mutual fund's breakpoint schedule applies only to purchases within a single fund family. Textbook Reference: Please see textbook section 4.2.5.5

All of the following statements regarding mutual fund breakpoints are true EXCEPT A) Financial advisors are prohibited from encouraging a customer to make a purchase just below the point at which a breakpoint would apply B) The breakpoint schedule applies to fund purchases in different fund families C) The breakpoint for a mutual fund purchase applies even if the fund purchase is made through a brokerage account at another broker dealer D) Breakpoints must be available for a mutual fund to charge the maximum allowable sales charge. Answer Explanation: A mutual fund's breakpoint schedule applies only to purchases within a single fund family. Textbook Reference: Please see textbook section 4.2.5.5

B) They are usually short-term investments Answer Explanation: Public non-traded REITs are offered to investors through broker-dealers. They are typically long term, and are highly illiquid because there is no public secondary market. They offer potentially high rewards for those that can withstand the liquidity constraints. The Securities Act of 1933 requires that these REITs provide disclosure through an offering prospectus and file annual and quarterly reports with the SEC. Textbook Reference: Please see textbook section 5.1

All of the following statements regarding public, non-traded REITS are true EXCEPT A) They are subject to registration and disclosure requirements of the Securities Act of 1933 B) They are usually short-term investments C) They do not trade in the secondary market D) They are typically illiquid

B) Corporate bonds Answer Explanation: The OTCBB is used for quoting domestic equities, ADRs and Direct Participation Programs that are not listed on stock exchanges and do not qualify for transaction reports on the Consolidated Tape. It does not report bonds. Textbook Reference: Please see textbook section 9.3.4.1

All of the following types of securities may be quoted on the OTC Bulletin Board except A) Direct Participation Programs B) Corporate bonds C) Domestic stocks D) ADRs

C) Within 10 seconds of execution Answer Explanation: All transactions in equity securities must be reported within 10 seconds of execution, in order to promote transparency for all market participants. Textbook Reference: Please see textbook section 9.5.3

All transactions in equity securities must be reported A) Within one hour of execution. B) Within 10 minutes of execution. C) Within 10 seconds of execution. D) By the close of business on the day of execution.

B) penny stock Answer Explanation: A penny stock, as defined by the SEC, is an OTC equity security worth less than $5 per share. Textbook Reference: Please see textbook section 1.2.2

An OTC equity security worth less than $5 per share is defined as a A) value stock B) penny stock C) speculative stock D) growth stock

A) Liquidating the partnership Answer Explanation: The general partner has authority to liquidate the limited partnership with a vote. The voting right of limited partners, or the exercise of the partnership democracy is used for the admission of a new GP, contesting a judgment against the LP and permitting the GP to take action that is specifically not permitted in the partnership agreement. Textbook Reference: Please see textbook section 5.2.3

An exercise of the partnership democracy is used in all of the following circumstances EXCEPT A) Liquidating the partnership B) Contesting a judgment against the LP C) Permitting a GP to take action that is not permitted in partnership agreements D) The admission of a new general partner

A) I and IV Answer Explanation: A change in corporate inventories is a leading indicator because it generally predicts an economic trend. An increase in inventories is a signal of economic decline because sales are slowing, which will result in less manufacturing. Textbook Reference: Please see textbook section 10.1.4.1

An increase in corporate inventories is I. A leading indicator II. A lagging indicator III.A sign of economic growth IV. A sign of economic decline A) I and IV B) I and III C) II and III D) II and IV

A) The next calculated NAV price Answer Explanation: Investors sell their shares at the net asset value price next calculated, which is the concept of forward pricing. Applicable commission would also be deducted from the proceeds. Textbook Reference: Please see textbook section 4.2.5.1

An individual contacts her financial representative to sell her mutual fund shares. The price she will receive is A) The next calculated NAV price B) The asked price at the close of the trading day C) The market price at the time the order is entered D) The next calculated POP price

A) POP price next calculated Answer Explanation: Mutual fund shares are purchased and redeemed at the next calculated price the concept of forward pricing. The customer will purchase shares at the public offering price next calculated (POP). Shares are redeemed at the next calculated NAV. Textbook Reference: Please see textbook section 4.2.5.1

An individual enters an online order for the purchase of mutual fund shares directly from the fund's sponsor. He will purchase shares at the A) POP price next calculated B) POP price calculated on that morning's market opening C) NAV price next calculated D) NAV price calculated on that morning's market opening

B) A fixed interest in a portfolio that is held for a specified period of time Answer Explanation: Investors in UITs purchase a share of a portfolio of securities that will be held until its date of termination which is defined at the inception of the trust. Textbook Reference: Please see textbook section 4.4.1.2

An individual that invests in a unit investment trust holds A) An interest in a variable portfolio of securities that will terminate at the discretion of the sponsor B) A fixed interest in a portfolio that is held for a specified period of time C) A fixed interest in a portfolio that will terminate at the discretion of the sponsor D) An interest in a variable portfolio of securities that is held for a specified period of time

C) The customer-specific aspect of the suitability rule Answer Explanation: An institutional account may qualify for an exemption from the customerspecific aspect of the suitability rule. The broker must believe the client is able to assess risks independently, and the client must confirm it is exercising independent judgement in evaluating the recommendation. Textbook Reference: Please see textbook section 7.1.2.1

An institutional account may be able to qualify for an exemption from A) All components of the securities industry suitability rule B) The reasonable basis aspect of the suitability rule C) The customer-specific aspect of the suitability rule D) The quantitative aspect of the suitability rule

C) Open-end investment company Answer Explanation: An open-end investment company will issue redeemable shares to investors which cannot be subsequently traded in the secondary market. An investor who wants to liquidate their shares must place an order with the fund company itself and the order will be filled at the next computed net asset value (NAV). Textbook Reference: Please see textbook section 4.2.5.1

An investment company that issues redeemable shares that cannot be traded in the secondary market is a(n) A) Equity linked note B) Exchange traded fund C) Open-end investment company D) Closed-end investment company

D) Equity REIT Answer Explanation: An equity REIT allows investors to own a proportionate interest in a portfolio of real estate properties in a variety of locations and sectors for a modest investment. REITs are viewed as a valuable portfolio diversification investment. Textbook Reference: Please see textbook section 5.1.4

An investment opportunity that allows investors to hold an ownership interest in real property in many locations and in many economic sectors is a A) Mortgage backed security B) Commodity fund C) GNMA D) Equity REIT

C) Liquidity risk Answer Explanation: Liquidity risk is the risk that an investment cannot be easily sold or converted to cash in the open market. Textbook Reference: Please see textbook section 7.2.8

An investment product that cannot be readily sold in the open market would carry a significant level of A) Interest rate risk B) Prepayment risk C) Liquidity risk D) Credit risk

D) limited partnership Answer Explanation: A limited partnership is a business structure where the investors (limited partners) have limited liability, and the general partners have unlimited personal liability. Textbook Reference: Please see textbook section 5.2.3

An investment structure where limited partners have limited liability and general partners have unlimited personal liability is a(n) A) public corporation B) real estate investment trust C) general partnership D) limited partnership

B) CMO. Answer Explanation: These types of structures are commonly known as collateralized mortgage obligations (CMOs). The structure is sold to investors in the form of "tranches", each having their own individual characteristics and risks. Textbook Reference: Please see textbook section 3.3.2

An investment which is a multi class debt instrument backed by a pool of mortgage pass-through securities is a(n) A) REIT. B) CMO. C) ETF. D) ELN.

B) 4.80% Answer Explanation: Nominal yield is the coupon rate, which is the annual interest paid divided by par value. Note that because the bond pays semi-annual interest of $24, the annual interest is $48, which is then divided by par value of $1,000. Textbook Reference: Please see textbook section 2.2.1

An investor buys a bond for $1,100. By May 1st, it has declined in value to $950. Assuming semi-annual interest payments of $24, what is the bonds nominal yield? A) 2.50% B) 4.80% C) 2.20% D) 5.10%

D) warrants Answer Explanation: Warrants are considered a form of equity security because they give holders the right to purchase shares of a company's common stock at a fixed price or on specified terms. Textbook Reference: Please see textbook section 1.1.1.7

An investor buys equity securities that convey the right to purchase shares of a company's common stock at a fixed price. These securities are called A) dividends. B) convertible bonds. C) depository receipts. D) warrants

A) Purchase common stock Answer Explanation: An investor concerned about interest rate risk should purchase common stock or convertible bonds. Textbook Reference: Please see textbook section 7.2.6

An investor concerned about interest rate risk might be advised to A) Purchase common stock B) Sell covered call options C) Purchase high grade corporate bonds D) Purchase preferred stock

C) A Russell 3000 Index ETF Answer Explanation: An ETF is exchange traded and offers immediate liquidity. An index ETF offers a lower cost option since the portfolio is comprised of the stocks included in an index and is more passively managed. UITs are not exchange traded and liquidity may be more limited. REITs hold real estate or mortgages, not equity securities. Private equity investments require a high initial outlay, and are mostly sold to accredited or institutional investors. Textbook Reference: Please see textbook section 4.5.1.2

An investor has $10,000 from a bonus that she wishes to invest in a portfolio of diverse equity securities. She would like to keep the cost of the investment as low as possible. Although she considers this a long-term investment she also wants to ensure that she can liquidate her interest immediately if she needs to. Which of the following recommendations may be most appropriate? A) A balanced mutual fund B) A private equity fund C) A Russell 3000 Index ETF D) A REIT

D) 300 shares at $30 per share Answer Explanation: A stock split doesn't affect the total value of stock owned. In this example, the shares are worth $9,000 before and after the split. But three times as many shares are owned. To calculate the new number of shares, multiply the shares by the first number of the split and divide by the second number of the split: 100 shares x 3 / 1 = 300 shares. Textbook Reference: Please see textbook section 1.7.4

An investor has 100 shares of XYZ stock at $90 per share. After a 3- for-1 split, the investor can expect to own A) 100 shares at $90 per share B) 100 shares at $30 per share C) 300 shares at $90 per share D) 300 shares at $30 per share

A) Once per year Answer Explanation: Corporate bonds pay interest twice per year, and together these two payments will provide the total stated coupon indicated by the issuer. In this case, the total stated coupon is 3%, which translates to $30 per year of interest income. The investor here has purchased 5 bonds, each paying $30 per year. The total interest income earned for the year on these 5 bonds is $150. Textbook Reference: Please see textbook section 2.1.4

An investor has purchased 5 ABC 3% Corporate convertible debentures with a maturity date of 20XX. This investor can expect to receive a total of $150 of interest from these bonds A) Once per year B) Every 30 days C) Every six months D) When the bonds mature

B) Tax exempt Answer Explanation: The monthly or quarterly dividend distributions that are received by holders of mutual fund shares are taxed as ordinary income, unless they come from municipal funds. Distributions from municipal funds are tax exempt. Textbook Reference: Please see textbook section 4.2.4.4

An investor receives monthly dividend distributions from the municipal bond fund he holds. For tax purposes these distributions are A) Taxed as ordinary income B) Tax exempt C) Tax deferred D) Taxed as long term capital gains

B) The dividend is taxable now as ordinary income and the investor's basis is increased. Answer Explanation: When a mutual fund dividend is reinvested, the dividend is taxable now as ordinary income, and the cost basis of the shares is increased. Textbook Reference: Please see textbook section 4.2.5.7

An investor has received a dividend from a mutual fund holding, and the dividend is reinvested. Which of the following statements are correct? A) The dividend is not taxable now, and the investor's basis is increased. B) The dividend is taxable now as ordinary income and the investor's basis is increased. C) The dividend is taxed now as a capital gain, with no impact to the basis. D) The dividend is taxable now as ordinary income, with no impact to the basis.

D) bond Answer Explanation: A face-amount certificate is a type of investment company that issues debt securities, obligating the issuer to pay a fixed amount at a specified date. Textbook Reference: Please see textbook section 4.1

An investor holding a face-amount certificate owns an instrument most similar to a(n) A) ETF B) ADR C) Share of common stock D) bond

D) Requires the issuer to return an investor's principal should the investor decide to sell his bond prior to maturity. Answer Explanation: A put feature allows an investor to demand early repayment of their principal, based on the occurrence of some predetermined event. For example, a put feature might be exercised if interest rates were to increase. Textbook Reference: Please see textbook section 2.1.9.1

An investor holds a bond containing a put feature. This provision A) Enables either the issuer or the investor to redeem the bond prior to maturity. B) Can only be exercised if interest rates declined C) Requires the investor to sell his bond back to the company prior to the maturity date of the bond. D) Requires the issuer to return an investor's principal should the investor decide to sell his bond prior to maturity.

B) An undivided interest in the shares of the securities held by the mutual fund Answer Explanation: An advantage of mutual fund investments is that investors own a proportionate share of all the securities within the portfolio (an undivided interest). They can achieve a high degree of diversification for a minimal investment. Textbook Reference: Please see textbook section 4.2.5

An investor in a mutual fund owns which of the following? A) A divided share of the securities that are held within the mutual fund's portfolio B) An undivided interest in the shares of the securities held by the mutual fund C) Specific securities within the mutual fund D) A proportionate interest in the specific portfolio securities that meet the investor's objectives

D) Sector fund Answer Explanation: A sector, or specialty fund, would be appropriate for an investor interested in focusing his investment dollars in a specific industry or sector. Textbook Reference: Please see textbook section 4.2.4.3

An investor interested in a particular segment of the economy may wish to purchase a A) Diversified fund B) Target date fund C) Fund of fund D) Sector fund

A) any premium to par payable on the call date. Answer Explanation: A call is always at the option of the issuer, never the investor. Normally, a call feature creates extra risk by shortening the investor's holding period, especially in times of falling rates. Issuers may agree to pay an additional price (call premium) above par for the call option. Textbook Reference: Please see textbook section 2.3.2

An investor is evaluating the purchase of a corporate bond with 12 years to maturity. Under a call feature, it can be called in 8 years. Another feature that can impact the amount of call risk is A) any premium to par payable on the call date. B) the credit standing of the issuer. C) the amount of common stock into which the bond may convert. D) any penalty the investor will pay for calling the bond early.

B) a price above par value. Answer Explanation: In bond pricing, a premium means the bond is trading at a price above par value. A discount indicates it is trading below par value. Textbook Reference: Please see textbook section 2.1.3

An investor is told that a bond is trading at a premium. This means the investor will pay A) a standard commission. B) a price above par value. C) a fairly wide bid/ask spread. D) a price above market value.

B) General Obligation Bonds Answer Explanation: Of these answer choices, general obligation bonds are the only option backed by the taxing power of the issuing municipality. Textbook Reference: Please see textbook section 3.4.1

An investor looking to earn tax-free income, while also minimizing risk would likely purchase A) Revenue Bonds B) General Obligation Bonds C) Moral Obligation Bonds D) Hospital Bonds

B) Holdings in each family must be considered individually to determine breakpoint eligibility. Answer Explanation: Investors cannot use their positions in multiple fund families to qualify for breakpoints in any one family. Textbook Reference: Please see textbook section 4.2.5.6

An investor owns shares in three different mutual fund families, each offering breakpoints. To qualify for a breakpoint in any one family, A) Ownership of multiple fund families disqualifies an investor to participate in breakpoints. B) Holdings in each family must be considered individually to determine breakpoint eligibility. C) The investor would need to sign a letter of intent. D) Holdings across all three families may be used to determine eligibility for a breakpoint in any one family.

A) equity securities, as they may be exercised for shares in XYZ. Answer Explanation: Warrants are considered equity securities of a company, as their exercise will allow the holder to receive shares of the underlying company. Note that warrants do not make interest payments to investors. Textbook Reference: Please see textbook section 1.1.1.7

An investor owns ten warrants of XYZ Co. These warrants are considered A) equity securities, as they may be exercised for shares in XYZ. B) convertible bonds, making regular interest payments, which may be exercised at any time. C) call options, which can always be exercised for their intrinsic value. D) stock rights, as they give the holder the ability to convert into the equity securities of XYZ for an indefinite period of time.

C) A money market fund Answer Explanation: Money market funds are appropriate for investments that need to be liquidated for their full value in a short time frame. Although not guaranteed, the value of each share has been held constant at $1, so investors in money market funds do not lose principal and can liquidate their shares for their full value plus interest that was earned. Textbook Reference: Please see textbook section 7.4

An investor plans to purchase a home in the next 6 12 months and would like to invest funds for a down payment in a mutual fund. Which of the following choices is most suitable? A) A balanced fund B) A real estate fund C) A money market fund D) A U.S. government bond fund

D) greater than 6 1/2% Answer Explanation: For this bond, NY = 5.5% and YTM = 6.5%. With YTM>NY, this indicates that the bond is sold at a discount, and for a discount bond, YTC > YTM. Textbook Reference: Please see textbook section 2.2.5

An investor purchased a 5 1/2% bond to yield 6 1/2%. If the company calls the bond at par before maturity, the investor's return would be A) 5.50% B) less than 5 1/2% C) 6.50% D) greater than 6 1/2%

D) $4,200.00 Answer Explanation: The investor's cost basis in this mutual fund is their original purchase price ($3,500) plus the reinvested dividends ($700), for a total of $4,200. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes. Textbook Reference: Please see textbook section 4.2.5.7

An investor purchased shares of a mutual fund two years ago for $3,500 and has since reinvested dividend distributions of $375 and $325. The investor's total cost basis in this fund is now A) $700.00 B) $2,800.00 C) $3,500.00 D) $4,200.00

A) 100 Answer Explanation: The amount of accrued interest for a municipal bond is calculated based on 360-day years. A $10,000 5% municipal bond pays $500 of interest each year. The number of days of interest is 72 (30 + 30 + 12), so the amount of interest is $500 x 72/360 or $100. Textbook Reference: Please see textbook section 2.4

An investor purchases a $10,000 5% municipal bond. The trade settles regular way on March 13th. The bond pays interest on January 1 and July 1. How much accrued interest is added to the price the seller receives? A) 100 B) 98.61 C) 50 D) 49.31

D) 100 Answer Explanation: The amount of accrued interest for a municipal bond is calculated based on 360-day years. A $10,000 5% municipal bond pays $500 of interest each year. The number of days of interest is 72 (30 + 30 + 12), so the amount of interest is $500 x 72/360 or $100. Textbook Reference: Please see textbook section 2.4

An investor purchases a $10,000 5% municipal bond. The trade settles regular way on March 13th. The bond pays interest on January 1 and July 1. How much accrued interest is added to the price the seller receives? A) 50 B) 49.31 C) 98.61 D) 100

B) 100 Answer Explanation: The amount of accrued interest for a municipal bond is calculated based on 360-day years. A $10,000 5% municipal bond pays $500 of interest each year. The number of days of interest is 72 (30 + 30 + 12), so the amount of interest is $500 x 72/360 or $100. Textbook Reference: Please see textbook section 2.4

An investor purchases a $10,000 5% municipal bond. The trade settles regular way on March 13th. The bond pays interest on January 1 and July 1. How much accrued interest is added to the price the seller receives? A) 98.61 B) 100 C) 50 D) 49.31

D) 100 Answer Explanation: The amount of accrued interest for a municipal bond is calculated based on 360-day years. A $10,000 5% municipal bond pays $500 of interest each year. The number of days of interest is 72 (30 + 30 + 12), so the amount of interest is $500 x 72/360 or $100. Textbook Reference: Please see textbook section 2.4

An investor purchases a $10,000 5% municipal bond. The trade settles regular way on March 13th. The bond pays interest on January 1 and July 1. How much accrued interest is added to the price the seller receives? A) 98.61 B) 50 C) 49.31 D) 100

B) II, I, IV, III Answer Explanation: When trading at a discount the lowest yield of a bond is the nominal yield (i.e. coupon), followed by the current yield, the yield to maturity, and the yield to call. You may want to note that the yield-to-worst is always the lower of the yield to maturity or yield to call. Textbook Reference: Please see textbook section 2.2.5

An investor purchases a 5% bond for 90. Rank the yields for this bond from lowest to highest I. Current Yield II. Coupon III. Yield to call IV. Yield to maturity A) I, II, III, IV B) II, I, IV, III C) II, I, III, IV D) I, II, IV, III

A) II, I, IV, III Answer Explanation: When a bond is trading at a premium, the nominal yield (i.e. coupon) is the highest rate, followed by the current yield, yield to maturity, and yield to call. Textbook Reference: Please see textbook section 2.2.5

An investor purchases a 6% bond for 115. Rank the yield computations for this bond from highest to lowest. I. Current yield II. Nominal yield III.Yield to call IV. Yield to maturity A) II, I, IV, III B) II, I, III, IV C) II, IV, I, III D) II, IV, III, I

D) A bond without a call feature Answer Explanation: For investors trying to avoid having a bond called due to falling interest rates, a bond, or preferred stock that does not carry a call feature would be an appropriate choice. Textbook Reference: Please see textbook section 7.2.1

An investor seeking to avoid call risk due to falling interest rates should purchase A) a callable bond B) a call option C) An interest rate sensitive security D) A bond without a call feature

B) II and IV Answer Explanation: Investors that liquidate their ownership in a UIT sell their units back to the issuing trust. The value of the units is determined at the end of the business day based on the current valuation of the securities held in the portfolio. Textbook Reference: Please see textbook section 4.4.2.1

An investor that holds units in a UIT needs to liquidate the units. These units will be I. Sold to another investor on an exchange II. Sold to the issuing trust III. Worth at least the price at which they were issued IV. Valued at the end of the business day of the transaction based on the assets held in the trust A) I and III B) II and IV C) I and IV D) II and III

C) S&P 500 ETF Answer Explanation: Index funds offer lower cost than other management company securities because of their passive style. This investor's wish to sell at the market price indicates a preference for closed-end fund shares over mutual funds which are sold at the next calculated NAV. Private equity funds may not provide great diversity, and hedge funds are more suited to institutional and accredited investors. Textbook Reference: Please see textbook section 4.5.1.2

An investor that is interested in owning an interest in a diverse stock portfolio at the lowest possible cost, and prefers the ability to sell shares at current market prices should consider which of the following? A) A private equity fund B) A hedge fund C) S&P 500 ETF D) An S&P 500 mutual fund

A) A breakpoint schedule Answer Explanation: A mutual fund breakpoint schedule offers a discount based on the amount of the investment. The larger the investment the lower the sales charge. The breakpoint schedule is published in the prospectus. Textbook Reference: Please see textbook section 4.2.5.5

An investor that purchases mutual funds receives a lower sales charge on a $200,000 investment than what would have applied to a $100,000 purchase. This mutual fund feature is called A) A breakpoint schedule B) Contingent deferred sales charge C) Rights of accumulation D) An unrealized gain

C) REIT Answer Explanation: A REIT would be a suitable investment for an individual seeking current income. Textbook Reference: Please see textbook section 5.1.6

An investor who has an investment objective of income would be most likely to purchase a(n) A) Call option B) Growth stock C) REIT D) Hedge fund

B) interest begins to accrue for a new issue, and will only be important for the first interest payment on the bond. Answer Explanation: The "dated date" is the date when interest begins to accrue on a new municipal bond issue. This date is used in determining the amount of the first interest payment only. Subsequent interest payments will be based on the semi-annual interest (coupon) payment dates for the bond. The dated date will no longer be relevant at this point. Textbook Reference: Please see textbook section 2.4

An investor who has purchased a new municipal bond issue notices a "dated date" of June 15. This is the date that A) represents the first semi-annual intertest payment date for the bond, the other being December 15. B) interest begins to accrue for a new issue, and will only be important for the first interest payment on the bond. C) the bond will first become available for investors to purchase. D) all future interest payments will be made on the bond.

D) II and IV Answer Explanation: Treasury Bills are purchased at a discount and mature to face value; no periodic interest is paid (i.e. they are zeroes). The minimum purchase amount of Treasury Bills is $100. Textbook Reference: Please see textbook section 3.2.1.1

An investor who purchases Treasury Bills can expect which of the following? I. Interest that is paid on a monthly basis II. The face value of the bill paid at maturity III. A minimum investment of $1,000 IV. A minimum investment of $100 A) I and IV B) II and III C) I and III D) II and IV

C) If there has been appreciation in the underlying security. Answer Explanation: An exchange-traded note may make an interest payment to an investor if there has been appreciation in the underlying security. If the underlying security has declined in value, the investor will only receive his principal returned at the instrument's maturity. Textbook Reference: Please see textbook section 5.5.1

An investor who purchases an exchange-traded note may expect to receive an interest payment A) Whenever the underlying security pays a dividend. B) On a quarterly cycle. C) If there has been appreciation in the underlying security. D) If the board of directors of the underlying security declares a dividend to holders of record. Answer Explanation: An exchange-traded note may make an interest payment to an investor if there has been appreciation in the underlying security. If the underlying security has declined in value, the investor will only receive his principal returned at the instrument's maturity. Textbook Reference: Please see textbook section 5.5.1

D) private activity bonds. Answer Explanation: The interest from private activity bonds may be included in the computation of alternative minimum taxes. These bonds are issued by municipalities for the benefit of private corporations. Textbook Reference: Please see textbook section 3.4.5.3

An investor wishes to avoid payment of alternative minimum taxes on securities within his investment portfolio. All of the following securities achieve this objective EXCEPT A) public housing bonds. B) limited tax bonds. C) bond anticipation notes. D) private activity bonds.

C) Tech stocks Answer Explanation: An investor with a growth objective is looking for capital appreciation, not income. Blue chip stocks and utility stocks typically supply a steady stream of income and little to moderate growth. Stock of a discount retailer is defensive, and is not necessarily a stock that will experience high appreciation. Tech stocks typically do not pay dividends but offer the opportunity for significant earnings growth. Textbook Reference: Please see textbook section 1.2.1.5

An investor with a growth objective would most likely purchase A) Utility stocks B) Stocks of a discount retailer C) Tech stocks D) Blue chip stocks

B) Commercial paper and T Bills Answer Explanation: An individual with a goal of income preservation would be most likely to purchase a money market security, such as commercial paper or Treasury paper. Textbook Reference: Please see textbook section 7.3.1

An investor with the goal of income preservation would be most likely to purchase A) Exchange traded funds B) Commercial paper and T Bills C) 1,000 shares of common stock D) Direct participation programs

A) investor holds the stock for at least 60 days surrounding the exdividend date Answer Explanation: Investors can receive preferred tax treatment on a cash dividend received from a corporation if the shares were held for at least 60 days surrounding the ex-dividend date. Textbook Reference: Please see textbook section 5.1.6

An investor would be eligible to receive preferential tax treatment on the dividend received from a corporation if the A) investor holds the stock for at least 60 days surrounding the exdividend date. B) corporation was included in the S & P 500 Index. C) investor received additional shares due to a stock split. D) shares were sold for a profit three months after they were purchased.

C) purchasing a new offering of municipal bonds Answer Explanation: An official statement is the primary disclosure document an investor would receive when purchasing a new offering of municipal bonds. Among the many disclosure items included are the risks associated with investing in the bonds. Textbook Reference: Please see textbook section 3.4.5.3

An investor would receive an official statement when A) investing in a private placement, or Regulation D offering. B) making a capital contribution into a company as an equity investor. C) purchasing a new offering of municipal bonds. D) receiving an allocation of an initial public offering (IPO).

C) may sell securities without filing a registration statement with the SEC Answer Explanation: Regulation D permits issuers to distribute securities in a private placement without filing a registration statement with the SEC provided they are not offered to the general public and follow the other rules as specified under Regulation D.

An issuer intending to distribute securities under Regulation D A) may sell securities only to residents of that state B) must file an offering notice with FINRA no later than 2 business days prior to distribution C) may sell securities without filing a registration statement with the SEC D) can sell no more than $5 million without a full registration statement

C) Adjust the coupon rate that it will pay to an investor

An issuer may use LIBOR as a benchmark to A) Calculate the capital gains tax from the sale of a bond B) Calculate the amount of new debt that it needs to issue to raise capital for the next fiscal year. C) Adjust the coupon rate that it will pay to an investor D) Determine the tax liability of an interest payment to an investor

D) Street name Answer Explanation: When securities are held in street name the broker-dealer is the nominal, or named, owner, and the issuer sends proxy statements and all other information about the securities to the firm, which must then distribute the information to the customer, who is the beneficial owner. DRS, DWAC and registered physical securities all list the customer as the named owner, so the issuer can communicate with the customers directly. Textbook Reference: Please see textbook section 1.6.2

An issuer will send proxy statements directly to the beneficial owner of the securities when they are held in all of the following forms EXCEPT A) DWAC B) DRS C) Registered physical certificates D) Street name

B) Good-Til-Cancelled (GTC) order Answer Explanation: A Good-til-Cancelled order is an order to buy or sell a stock that remains on the limit order book until the order is executed or cancelled Textbook Reference: Please see textbook section 9.4.3

An order that remains on the limit order book until executed or cancelled is known as a(n) A) Marketable limit order B) Good-Til-Cancelled (GTC) order C) Immediate or cancel order D) Opening cross order

B) When a customer's order is received Answer Explanation: Per industry practice, an order ticket should be completed when a customer's order is received by the firm. Textbook Reference: Please see textbook section 9.4.1

An order ticket, or memorandum, must be completed A) When a customer's order is executed B) When a customer's order is received C) When a customer's order is confirmed D) When a customer's order is archived.

C) Sale-and-repurchase agreement Answer Explanation: Repos are also called sale-and-repurchase agreements. Technically, they are not instruments or securities but rather transactions in which one party sells a high-quality instrument for cash and agrees to buy it back at a different price. Textbook Reference: Please see textbook section 3.6.4

Another name for a repo is A) Collateralized loan facility B) Sale/leaseback agreement C) Sale-and-repurchase agreement D) Counterparty swap

A) Yes, if they manage private funds with more than $150 million in assets Answer Explanation: The Dodd Frank Wall Street Reform Act of 2010 added provisions designed to increase transparency and disclosure in hedge funds. Hedge funds that manage private funds with more than $150 million in assets must register with the SEC. Textbook Reference: Please see textbook section 5.3.1

Are hedge funds required to register with the SEC? A) Yes, if they manage private funds with more than $150 million in assets B) Yes, if they have more than 35 investors C) No, because they are exempt from registration under US securities law D) All hedges must register, except those operated for the exclusive benefit of family offices.

C) The people who will sit on the corporation's board Answer Explanation: Common stockholders have voting rights, which entitles them to voice an opinion on the selection of the board of directors, and other matters of corporate policy. Textbook Reference: Please see textbook section 1.1.1.2

As a common stockholder, an investor has an opportunity to cast a vote, which means they can indicate a preference for A) The amount assigned as the par-value of the company's stock B) The number of Treasury shares the corporation will repurchase C) The people who will sit on the corporation's board D) The number of shares a corporation will issue

A) qualified institutional buyers Answer Explanation: QIBs generally are institutions or other entities that, in aggregate, own and invest (on a discretionary basis) at least $100 million in securities. Textbook Reference: Please see textbook section 8.2.5

As part of Rule 144A, the SEC created another category of financially sophisticated investors known as A) qualified institutional buyers B) sophisticated wealthy individuals C) accredited investors D) qualified asset managers

D) In a combination of assets to help diversify their investments Answer Explanation: Asset allocation funds invest in a combination of asset classes, including stock, bonds, and cash equivalents. This blend of assets helps investors achieve diversification in their portfolio. Textbook Reference: Please see textbook section 4.2.4.5

Asset allocation funds invest A) In cash and cash equivalents only B) In two asset classes at a time C) in a single asset class at a time D) In a combination of assets to help diversify their investments

D) At the Federal income tax level, but not the state/local level Answer Explanation: Interest paid on U.S. Treasury bonds and other direct obligations of the U.S. Government is taxable at the federal income tax level, but is excluded from taxable income for state and local income tax purposes. Textbook Reference: Please see textbook section 3.5

At which of the following levels is the interest paid on U.S. Treasury obligations taxable? A) At neither the federal nor state level B) At both the federal and state/local income tax levels C) At the State/local income tax level, but not the federal level D) At the Federal income tax level, but not the state/local level

D) It isn't known Answer Explanation: The stop order will convert into a market order when any shares of Time Warner sell at $11. However, there is no guarantee of the next-sale price. It probably will be about $11 but it could be lower. This is a vulnerability of both market and stop orders. Textbook Reference: Please see textbook section 9.4.4

Cleo wants to make sure she gets a good price when she sells her 400 shares of Time Warner stock. If she enters a stop order to sell the shares at $11, what is the worst price she can get? A) $11 B) $10 C) $10.99 D) It isn't known

Answer Explanation: To avoid having limit prices on GTC buy limit orders reduced by the amount of stock dividends paid, the instruction do not reduce (DNR) should be added to the limit order. She will enter the order: Buy 300 Kroger @ $27 DNR. Textbook Reference: Please see textbook section 9.4.5

Barbara is placing a GTC limit order to buy 300 Kroger shares at $27. The company has declared a quarterly dividend and the ex-dividend date will be this week. How can she prevent her buy limit order price from being reduced on the ex-dividend date? A) Use the instruction AON B) Place a qualifying order with her broker C) Use the instruction DNR D) Use the instruction FOK

B) preferred status in a corporate liquidation Answer Explanation: Investors purchase common stock largely for its appreciation potential. They also benefit from voting rights and dividends when declared by the Board of Directors. Common stock, however, is junior in claim to all other outstanding securities in a corporate liquidation. Textbook Reference: Please see textbook section 1.1.1.4

Benefits of common stock ownership include all of the following EXCEPT A) the right to receive dividends when declared B) preferred status in a corporate liquidation C) the opportunity for capital appreciation D) the right to elect the company's Board of Directors

A) Issuing securities under a Regulation D Private Placement Answer Explanation: Any company seeking to target accredited investors in the U.S. would issue via a Regulation D private placement. Reg D allows the issuer to solicit an unlimited under of accredited investors. Rule 144A involves Qualified Institutional Buyers (QIBs), not accredited investors. Regulation S is for companies issuing securities only to non-U.S. residents. Textbook Reference: Please see textbook section 8.2.3

BigKangarooCo (BKC) is an Australian company listed on the Australian Stock Exchange. BKC would like to raise capital in the United States, avoid SEC registration, and target accredited Australian investors currently residing in the U.S. BKC could best achieve these objectives by A) Issuing securities under a Regulation D Private Placement B) Issuing securities under Rule 144A C) Submitting a Form S-1 with the SEC D) Issuing Securities under a Regulation S offering

C) Investment-grade Answer Explanation: Bonds with investment-grade ratings meet the standards of investors who want to emphasize safety and high quality. The lowest investment-grade rating is Baa for Moody's and BBB for Standard & Poor's. Textbook Reference: Please see textbook section 2.3.5.1

Bond investors who wish to emphasize safety and high quality often limit their holdings to bonds with which of the following ratings? A) Non-speculative B) Top-tier C) Investment-grade D) Superior Answer Explanation: Bonds with investment-grade ratings meet the standards of investors who want to emphasize safety and high quality. The lowest investment-grade rating is Baa for Moody's and BBB for Standard & Poor's. Textbook Reference: Please see textbook section 2.3.5.1

A) Industrial revenue bonds Answer Explanation: Industrial development bonds are issued by governments for the benefit of private corporations. Revenue streams raised by the facilities pay principal and interest. They are a form of conduit bond. Projects funded by IDRs include parking garages, factories, industrial parks, and sports stadiums. Textbook Reference: Please see textbook section 3.4.5.3

Bonds that are issued by state and local governments but benefit a private corporate are A) Industrial revenue bonds B) Special assessment bonds C) Double barreled bonds D) Moral Obligation bonds

B) elimination of systematic risk Answer Explanation: Systematic risk, also referred to as market risk, cannot be avoided through broad diversification because almost all stocks are influenced by the direction of the market. Textbook Reference: Please see textbook section 1.3.1

Broadly diversifying an equity portfolio creates all the following benefits except A) reduction of portfolio beta. B) elimination of systematic risk. C) protection against a decline in a specific economic sector. D) the opportunity to participate in different capitalization sizes

A) Multiple classes of common shares

Closed-end company investments share all of the following features EXCEPT A) Multiple classes of common shares B) May be purchased on margin C) Offer common, preferred, and debt securities D) A fixed number of shares issued

A) Multiple classes of common shares Answer Explanation: Closed-end companies issue a single share class only. They are permitted to issue preferred shares and debt securities in addition to common shares. Textbook Reference: Please see textbook section 4.3.2

Closed-end company investments share all of the following features EXCEPT A) Multiple classes of common shares B) Offer common, preferred, and debt securities C) May be purchased on margin D) A fixed number of shares issued

B) Do not have stated termination dates Answer Explanation: There are no stated termination dates for closed-end funds and ETFs. Textbook Reference: Please see textbook section 4.6

Closed-end funds and ETFs are similar to each other in that they both A) Engage in continuous public offer shares of shares/units B) Do not have stated termination dates C) Offer redemption of their own issued shares D) Have actively managed portfolios

D) unsecured promissory note. Answer Explanation: Commercial paper is a type of short-term unsecured promissory note. Its maximum time to maturity is 270 days. Textbook Reference: Please see textbook section 3.6.1

Commercial paper is best characterized as a (n) A) long term debenture B) collateral trust agreement C) repurchase agreement D) unsecured promissory note.

B) 270 days Answer Explanation: Commercial paper is generally exempt from securities registration requirements under the 33 Act, as long as maturities do not exceed 270 days. However, transactions in commercial paper are not exempt from anti-fraud provisions of U.S. securities law Textbook Reference: Please see textbook section 3.6.1

Commercial paper is exempt from securities registration requirements as long as maturities do not exceed A) 180 days B) 270 days C) 90 days D) One year

B) Regulation D offering Answer Explanation: A company seeking to avoid registration in the U.S. and targeting accredited investors would issue securities via a Regulation D private placement. Regulation D private placements can be sold to an unlimited number of accredited investors and, for deals in excess of $5mm, up to 35 non-accredited investors. This type of offering would allow the issuer to avoid filing an SEC registration statement. Textbook Reference: Please see textbook section 8.2.3

Company J is a Japanese company listed on the Tokyo Stock Exchange. Company J would like to raise additional equity by selling securities in the United States and would like to target accredited Japanese investors in the U.S. but would also prefer to avoid registering with the SEC. The best way to do so would be via a(n) A) S-1 filing B) Regulation D offering C) Rule 147 offering D) Regulation A offering

C) 214250 Answer Explanation: Under Rule 144, a corporate insider can seller the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks. In this case, 1% of the outstanding shares = 150,000 while the average weekly trading volume over the previous four weeks = 214,250. Therefore, a corporate insider could sell 214,250 shares. Textbook Reference: Please see textbook section 8.2.4.2

Company N has 15,000,000 shares outstanding and the following trading data over the previous five weeks: Five weeks ago: 192,000 shares traded Four weeks ago: 200,000 shares traded Three weeks ago: 245,000 shares traded Two weeks ago: 187,000 shares traded Last week: 225,000 shares traded What is the maximum number of shares that could be sold by a corporate insider over the next three months? A) 150000 B) 206000 C) 214250 D) 209900

A) Interest rates fell Answer Explanation: The most likely factor that caused a change in the trading value of a bond is a change in prevailing market interest rates. The inverse relationship between bond price and interest rates instructs that when interest rates go down, bond prices go up. Likewise, if rates go up, bond prices go down. Textbook Reference: Please see textbook section 2.1.6

D) exempt from SEC registration. Answer Explanation: Unregistered securities can not be sold in interstate commerce unless they qualify for one of several exemptions from registration. In general, it doesn't matter who buys, sells or trades unregistered securities. It only matters whether or not they have qualified for an exemption. Textbook Reference: Please see textbook section 8.2

Answer Explanation: The current yield of a bond is found by dividing the annual interest by the bond's market price. In this case, we divide the annual interest, which is $20 ($10 semiannual coupon x2), by the market price of $1,030, to arrive at the current yield of 1.9%. Note that bonds are quoted as a percentage of par, which is $1,000. Therefore, a quote of 103, means 103% of par or $1,030. Textbook Reference: Please see textbook section 2.2.2

DEF Corporate debenture is quoted at 103 and pays a $10 semiannual coupon. What is the current yield of this bond? A) 0.9% B) 1.9% C) 9.7% D) 19.4%

C) Monthly and are taxed at all levels Answer Explanation: Distributions from a CMO are made on monthly basis and are taxed at the federal, state, and local level. Their monthly distributions make them appropriate for investors who are seeking income on a monthly basis. Textbook Reference: Please see textbook section 3.3.1

Distributions from a CMO are made A) Quarterly and are taxed at all levels B) Monthly and are taxed at the federal level only C) Monthly and are taxed at all levels D) Quarterly and are taxed at the federal level only

D) quarterly Answer Explanation: Dividends are typically paid on a quarterly basis and, therefore, must be annualized to calculate the implied dividend yield for a given public company. Textbook Reference: Please see textbook section 1.5.1.3 KnopmanMarks http://testprep.knopman.com SIE Exam - 5/26/2021 9:02 PM 2 of

Dividends are typically paid A) monthly B) annually C) semi-annually D) quarterly

B) An individual account owned by a client of the managing underwriter Answer Explanation: FINRA Rule 5130 defines a restricted person as any FINRA member firm, a broker-dealer and its employees, finders or fiduciaries (i.e. attorneys and accountants) of the managing underwriter, or immediate family members of any of those persons. New issues may not be sold into an account in which a restricted person has ownership. New issues can be sold to clients of the underwriter. Textbook Reference: Please see textbook section 8.3.6

FINRA Rules 5130 prohibits the sale of a new issue to all of the following accounts EXCEPT A) An individual account owned by the spouse of a Registered Representative B) An individual account owned by a client of the managing underwrite r C) An individual account owned by an employee of another Broker- Dealer D) An individual account owned by an attorney of the managing underwriter

D) Interpositioning Answer Explanation: Interpositioning can be used to increase trading volume or order flow. It also can be used to circumvent the best execution responsibility. Textbook Reference: Please see textbook section 9.5.1.1

FINRA prohibits member firms from adding an extra broker or dealer as a principal to a trade, in a way that has no benefit for the customer. This practice is called A) Interloping B) Double dealing C) Circumvention D) Interpositioning

D) Issuers, their affiliates and promoters Answer Explanation: FINRA's general rule prohibits any member from accepting any payment or other consideration, directly or indirectly from an issuer, any affiliate, or a promoter for publishing a quote or acting as market maker. Textbook Reference: Please see textbook section 9.5.6

FINRA prohibits members from accepting payments from which entities for publishing quotes or market making? A) The issuer only B) Affiliates of the issuer only C) Promoters only D) Issuers, their affiliates and promoters

A) An owner of an ETN holds equity securities with voting rights Answer Explanation: ETNs are debt notes that are unsecured and backed by the credit of the issuer. They are designed to blend some of the features of ETFs with debt securities, and track performance of market indices to yield profits for investors. ETNs are traded on major exchanges, but investors can also hold these debt securities until maturity. They are considered more tax efficient than mutual funds or ETFs because there is no annual distribution of capital gains from the fund. Gains or losses are realized only when the investment is sold. Textbook Reference: Please see textbook section 5.5.1

Features of ETNs include all of the following EXCEPT A) An owner of an ETN holds equity securities with voting rights B) ETNs can be liquidated prior to maturity by selling them on an exchange or to the issuer C) ETNs have a maturity date and are backed only by the credit of the issuer D) Unlike ETFs or mutual funds, investors in ETNs do not receive an annual distribution

C) Within 30 calendar days Answer Explanation: The final settlement of the municipal syndicate account must be effected within 30 calendar days. Settlement of designated credits must be disclosed and paid within 10 business days. Textbook Reference: Please see textbook section 8.4.1.2

Final settlement of a municipal syndicate account must be completed A) Within 30 business days B) Within 10 calendar days C) Within 30 calendar days D) Within 10 business days

C) A public utility Answer Explanation: User fee back revenue bond issues. Public utilities collect user fees which are used for payment of debt service. Textbook Reference: Please see textbook section 3.4.2

Financing for which of the following is most likely supported by a revenue bond? A) A street improvement project in a small town B) The building of a new school C) A public utility D) A city government office building

B) in a deflationary environment Answer Explanation: In a deflationary environment, the FED will tend to lower interest rates to spur economic activity, and the result would be an increase in fixed income prices. Textbook Reference: Please see textbook section 10.2.5.2

Fixed income securities will tend to increase in value A) in an inflationary environment B) in a deflationary environment C) while interest rates are rising D) as the securities approach their maturity dates.

C) AA+ Answer Explanation: Moody's ratings use upper and lower case letters (Aa), while S&P uses all caps. Remember that "The poor wear caps." Moody's uses a 1 to indicate higher quality within a given rating. S&P uses a +. Textbook Reference: Please see textbook section 2.3.5.1

For a bond that Moody's rates Aa1, what is the corresponding S&P rating? A) AAA B) Baa C) AA+ D) Baa

B) executed at that day's price. Answer Explanation: Mutual fund orders are executed at the net asset value (NAV) calculation, which occurs at the end of each business day (4 p.m.). A late trading violation occurs when orders are entered after 4 p.m. and the transaction is based on the same day's NAV, rather than the next day's NAV. Textbook Reference: Please see textbook section 4.2.6

For a late trading violation to occur, a mutual fund purchase or redemption order must be received after the close of business and then be A) cancelled prior to the next day's market open. B) executed at that day's price. C) executed at the next day's price. D) executed at any time or price

C) One designated market maker Every NYSE-listed security has one designated market maker assigned to it. In the Nasdaq marketplace, there may be several market makers trading that particular security. Textbook Reference: Please see textbook section 9.3.2.1

For every security listed on the NYSE, there is (are) A) Multiple market makers. B) A limit to how many shares of that security may trade on a given business day. C) One designated market maker. D) Several institutional traders.

D) Right below $34 Answer Explanation: Buy stop orders generally are placed above the current market price. Sell stop orders are placed below the current market price. In this case, he is protecting part of his profits if the price declines below $34 per share. Textbook Reference: Please see textbook section 9.4.4

Harrison owns 1,000 shares of Target stock, which he purchased at $30 per share. It currently is selling for $34 and he would like to protect his profits with a sell stop order. This order will be entered A) At $30 or below B) At $30 or above C) Right above $34 D) Right below $34

C) 12 months Answer Explanation: Most securities acquired through private placements are restricted or control securities. If they are issued by companies that report financial information to the SEC, they must be held at least six months. If no financial information is reported by the issuer, they must be held 12 months. Textbook Reference: Please see textbook section 8.2.4.1

Harry is an accredited investor who purchases securities in a Regulation D private placement. The issuer of the securities does not report financial information to the SEC. How long must Harry hold the securities, at minimum, before they can be resold? A) There is no holding period requirement B) 18 months C) 12 months D) 6 months

A) To close the fund to new investors Answer Explanation: A lock up period is not used to prohibit new investment into a hedge fund. Instead, it limits liquidity by imposing a time frame during which investors cannot withdraw assets. This allows the fund to pursue higher returns by limiting the amount of cash on hand, facilitating investment in illiquid assets, and permitting greater overall investment flexibility. Textbook Reference: Please see textbook section 5.3.3.1

Hedge fund managers generally employ lock up periods for all of the following reasons EXCEPT A) To close the fund to new investors B) To provide greater investment flexibility C) To commit to investments that are not liquid D) To keep lower amounts of cash on hand

D) Tuesday. Answer Explanation: Although most trades settle regular way (T+2), cash-settled trades settle on the same day as the trade date. Textbook Reference: Please see textbook section 1.7.1

On Tuesday, an investor buys stock in a cash-settled transaction. The trade will settle on A) Wednesday. B) Thursday. C) the dividend record date. D) Tuesday.

D) No, because they meet neither test. Answer Explanation: For Regulation D offerings, the accredited investor assets test is to have a net worth, excluding home equity, of $1 million, jointly or with a spouse. The income test for married persons is a joint income of $300,000 in each of the two most recent years, with reasonable expectations of the same this year. They meet neither test. The income test for a single person is $200,000. Textbook Reference: Please see textbook section 8.2.3

Henry and Jennifer, a married couple, have a net worth of $800,000, excluding home equity. Their income has been about $250,000 for several years. Are they eligible to participate in a private placement of securities as accredited investors? A) Yes, because they meet the income test B) Yes, because they meet the net worth test C) Yes, because they meet both tests D) No, because they meet neither test.

B) Highly -rated corporate bond Answer Explanation: Corporate bonds will generate fully taxable income, so an investor seeking tax-free income might look elsewhere for tax preferred products. Question is asking for which option investor is LEAST interested in Textbook Reference: Please see textbook section 7.3.3

High-net-worth investors, who are typically seeking tax-free income, may be least interested in which of the following products? A) Tax-free bond fund B) Highly -rated corporate bond C) Municipal bond D) Municipal bond fund

B) II and IV Answer Explanation: ETFs are often less costly to own than closed-end company shares because they employ a more passive fund management strategy. Their portfolios are often constructed to replicate a major index or other market benchmark and less actually managed. Textbook Reference: Please see textbook section 4.5.1.1

How do ETFs differ from closed-end company shares? I. ETFs are typically higher cost investments II. ETFs are typically lower cost investments III. ETFs are typically more actively managed IV. ETFs are typically less actively managed A) I and III B) II and IV C) I and IV D) II and III

B) General Obligation Bonds Answer Explanation: Of these options, general obligations bonds are the best answer choice as they are backed by the taxing power of the municipality and provide tax-free interest. Although, Treasury bonds are safer than GO bonds, the interest income provided by treasuries is taxable at the federal level. Textbook Reference: Please see textbook section 3.4.1

Howard is a corporate lawyer in New York earning $300,000 per year. He wants to add some tax-free income to his portfolio, but is very risk adverse. Which of following bonds would be best suited to meet his investment objectives? A) Revenue Bonds B) General Obligation Bonds C) Moral Obligation Bonds D) Treasury Bonds

D) Unlimited Answer Explanation: Potential losses on short sales are unlimited. If the stock price soars, the investors must buy back the stock at a very high price, to replace the shares borrowed. This is why short-selling can be so risky. Textbook Reference: Please see textbook section 1.8

If Janice sells short 100 shares of Microsoft stock at $20 per share, what is the maximum she can lose on the trade? A) $10 per share B) $5 per share C) $20 per share D) Unlimited

C) It will be halved Answer Explanation: A "DNR" (do not reduce) instruction applies only to cash dividends - not stock distributions or splits. The instruction is ignored in the case of a stock split. Textbook Reference: Please see textbook section 9.4.5

If a buy limit order is marked "DNR," what adjustment must be made to its price before the open on the ex-dividend date, assuming a 2- for-1 split? A) It will not change B) It will be doubled C) It will be halved D) The client must be contacted to verify instructions

C) three years Answer Explanation: A shelf registration gives the issuer flexibility in terms of issuing securities that have been pre-registered. The shelf registration is valid for three years, and may be used for both equity and debt offerings, but not IPOs. Textbook Reference: Please see textbook section 8.3.1

If a company elects to use a shelf registration, it may register securities today and issue them at any point during the ensuing A) five years B) 90 days C) three years D) one year

D) the bond will default. Answer Explanation: A bond will default if the issuer fails to make an interest or principal payment on the security. The issuer is legally obligated to make these payments, per the conditions of the security. Textbook Reference: Please see textbook section 2.3.5

If a corporation fails to make a payment on an outstanding debt obligation, A) it must make a double payment the next time interest is due to be paid. B) all bondholders must be notified within 24 hours. C) the chief financial officer of the corporation must arrange for an escrow payment to be made prior to the next interest payment cycle. D) the bond will default.

A) Investor interest in this stock may decrease\ Answer Explanation: When a corporation that has regularly paid dividends skips dividend payments, investors may shun the stock. Less buyer interest will cause the price to fall, and the current yield (annual dividends/market price) to outstanding shareholders will decrease. Dividend payments are not guaranteed to outstanding shareholders, so it is not a violation of shareholder rights to skip a dividend. Textbook Reference: Please see textbook section 1.5.1.3

If a corporation that has regularly paid dividends skips payment of dividends for two consecutive quarters A) Investor interest in this stock may decrease B) The corporation has violated shareholder rights of ownership C) The market price of the stock will most likely not be affected by this action D) The current yield of outstanding shares will increase

A) at a discount Answer Explanation: 6.25% represents that nominal yield, or coupon rate, and 6.45% represents the yield-to-maturity. When the YTM is greater than the NY, the bond is trading at a discount as the investor will earn a capital gain upon maturity, thus yielding a higher rate than just the 6.25% coupon payments. Textbook Reference: Please see textbook section 2.2.5

If a municipal issue is quoted as "Orange County, LA, General Obligation bonds: 6.25% of 2035 at 6.45%, the bonds are selling A) at a discount B) flat C) at par D) at a premium

A) Prepared to sell her shares back to the company Answer Explanation: Investors holding callable preferred stock may be required to sell their shares back to the company, if their particular shares are called by the company. Textbook Reference: Please see textbook section 1.5.2

If an investor is holding callable preferred stock, she should be A) Prepared to sell her shares back to the company B) Prepared to negotiate a stock buyback program with the company C) Willing to call the company and discuss the possible liquidation of her shares D) Willing to purchase additional shares from the company

A) call options Answer Explanation: An investor who purchases a call option is at risk of losing the entire premium paid for the option, and thus should be avoided in a portfolio that seeks to minimize capital risk. Textbook Reference: Please see textbook section 7.2.3

If an investor wants to build a portfolio that will carry minimal capital risk, they should avoid A) call options B) blue chip stocks C) stock index funds D) corporate bonds

D) II and IV Answer Explanation: When interest rates are lower in the U.S., foreign investors do not look for U.S. investment opportunities, and U.S. investors are likely to seek international investment opportunities. The dollar weakens against foreign currency when U.S. interest rates are low. This is in part due to U.S. investors selling their currencies for investable foreign currencies. Textbook Reference: Please see textbook section 10.4.3

If international interest rates have been rising while U.S. rates are falling which two of the following are likely to occur? I. International investment in U.S. securities will increase II. U.S investors will increase their international investments III. The U.S. dollar will strengthen IV. The U.S. dollar will weaken A) I and IV B) I and III C) II and III D) II and IV

B) Only the general partner(s) Answer Explanation: General partners each have unlimited personal liability for the partnership's debts and obligations. Limited partners' liability is confined to their investments, plus any debts personally incurred. Textbook Reference: Please see textbook section 5.2.1

In a Master Limited Partnership, who has unlimited liability for the debts and obligations of the partnership? A) All partners B) Only the general partner(s) C) Only the limited partners D) Liability is allocated in the operating agreement

A) Central depository Answer Explanation: When a book-entry format is used, ownership is recorded by a central depository, rather than by the issuer. This has become the most common method of tracking ownership. Textbook Reference: Please see textbook section 2.1.1

In a book-entry format, ownership of the security is recorded by A) Central depository B) Corporate counsel C) Clearing house D) The issuer

D) The general partner Answer Explanation: In a limited partnership, a general partner has management responsibility, including trading authority over a partnership brokerage account. Limited partners are passive investors who do not have hands-on management responsibilities or trading authority. Textbook Reference: Please see textbook section 5.2.3

In a brokerage account opened by a limited partnership, who has trading authority? A) The board of directors B) The trustee C) One or more limited partners D) The general partner

D) Common stock holders Answer Explanation: Common stock and warrants fall last in the priority of claims. In corporate bankruptcies, holders of common stock are often have no recovery. Textbook Reference: Please see textbook section 3.1.2.3

In a corporate bankruptcy, holders of what securities would be least like to recover their investment? A) Debtor in possession financing B) Junior debt holders C) Preferred stock holders D) Common stock holders

D) Senior secured debt Answer Explanation: Senior secured lenders are also called "hard asset lenders." They place first liens on specific corporate assets, such as equipment, vehicles or buildings and these assets stand as collateral to make sure loans are repaid. Textbook Reference: Please see textbook section 3.1.2.3

In a corporate liquidation, which of the following securities have the highest priority to receive any remaining assets? A) Preferred stock B) Common stock C) Mezzanine debt D) Senior secured debt

C) the Federal Deposit Insurance Corp (FDIC). Answer Explanation: The FDIC is an independent agency created by the U.S. government. It protects bank deposits for up to $250,000 per depositor, per institution, if a bank fails. Textbook Reference: Please see textbook section 3.6.2

In the United States, certificates of deposit are insured for up to $250,000 per depositor by A) the US Treasury. B) the Securities Investor Protection Corp. (SIPC). C) the Federal Deposit Insurance Corp (FDIC). D) the MSRB.

A) I and III Answer Explanation: A firm commitment is an underwriting agreement in which the underwriters have obligation to buy the securities that are not purchased by investors. These agreements are the most common types of corporate underwritings. Textbook Reference: Please see textbook section 8.3.3

In a new offering of corporate securities, a firm commitment I. Is the most common type of underwriting II. Is typically used for high risk securities III. Assigns financial responsibility for unsold shares to the underwriters IV. Assigns no responsibility for unsold shares to the underwriters A) I and III B) II and IV C) II and III D) I and IV

B) The Agreement Among the Underwriters Answer Explanation: The Agreement Among the Underwriters defines the terms between the syndicate members in an underwriting of corporate securities. The Underwriting Agreement is between the issuer and the syndicate manager. The Selected Dealer Agreement is between the syndicate manager and the selling group. Textbook Reference: Please see textbook section 8.3.4.1

In a public offering, the terms and conditions between the syndicate members are identified in a contract known as A) The Underwriting Agreement B) The Agreement Among the Underwriters C) The Selected Dealer Agreement D) The Syndicate Letter

D) Senior debt, junior debt, preferred stock Answer Explanation: Debt ranks ahead of equity, and preferred stock ranks ahead of common. Mezzanine debt is the lowest ranked type of debt and senior secured debt is the highest. Textbook Reference: Please see textbook section 3.1.2.3

In a ranking of corporate securities from highest to lowest priority in the corporate capital structure, which of the following lists is accurate? A) Preferred stock, junior debt, mezzanine debt B) Mezzanine debt, junior debt, common stock C) Preferred stock, common stock, junior debt D) Senior debt, junior debt, preferred stock

B) A premium to current market value Answer Explanation: The acquiring party will typically offer shareholders a premium to the current market value of the stock, as an incentive to sell their shares, and thereby take greater control of the business. Textbook Reference: Please see textbook section 8.2.6.1

In a tender offer, the price that the acquiring party is offering to pay to existing investors is A) At least 5% above current market value B) A premium to current market value C) A discount to current market value D) About the same as the current market value of the company's shares

A) Unit Investment Trusts Answer Explanation: The three basic types of investment companies that are regulated under the Investment Company Act of 1940 are management companies, faceamount certificates and unit investment trusts. Textbook Reference: Please see textbook section 4.4

In addition to management companies and face-amount certificates, what is the third basic investment company type regulated under the Investment Company Act of 1940? A) Unit Investment Trusts B) REITs C) Private Equity funds D) Direct participation programs

B) $39 Answer Explanation: Underwriters buy shares from the issuing company at the public offering price minus the spread. Textbook Reference: Please see textbook section 8.3.5

In an IPO, the public offering price is $42 per share. Assuming a $3 spread per share, what price do the underwriters pay the issuer for the securities? A) between $39 and $42 B) $39 C) $45 D) $42

A) decrease Answer Explanation: In an inflationary period, interest rates will generally rise, causing bond prices to fall. Textbook Reference: Please see textbook section 10.2.5.2

In an inflationary environment, bond prices will tend to A) decrease B) remain the same C) increase D) decline, then rise

A) I and III Answer Explanation: In a corporate underwriting, syndicate members are invited to participate according to the terms of the Agreement Among the Underwriters. Syndicate members have financial responsibility for securities that are unsold in accordance with the terms of the agreement. The selling group participates according to the Selected Dealer Agreement and does not have financial responsibility for unsold securities. Please see textbook section 8.3.4.1

In an underwriting of corporate securities, syndicate members participate in the distribution of the securities I. Based on the terms of the Agreement Among the Underwriters II. Based on the terms of the Selected Dealer Agreement III.With financial responsibility for unsold securities IV. Without financial responsibility for unsold securities A) I and III B) II and IV C) I and IV D) II and III

B) the managing underwriter and the selling group members Answer Explanation: A selected dealer agreement is used between the managing underwriter and selling group members that assist in the sale of a new issue without financial responsibility for any of the unsold securities. Textbook Reference: Please see textbook section 8.3.4.2

In an underwriting of new securities, the parties to a selected dealer agreement are A) the issuer and the managing underwriter B) the managing underwriter and the selling group members C) the issuer and the selling group members D) the managing underwriter and the syndicate members

A) I and III Answer Explanation: The market for U.S. government securities is the largest in the world. It is also highly liquid. Although the municipal securities market is also very large, it does not have the same worldwide participation. It is not nearly as liquid, because many municipal issues are relatively small in size and may be issued by relatively small municipalities. Textbook Reference: Please see textbook section 3.2

In comparing trading of U.S. Treasury securities to trading of municipal securities issues, which two statements are TRUE? I. The market for U.S. government securities is more liquid II. The market for municipal securities is more liquid III. The trading market for U.S. government securities is larger IV. The trading market for municipal securities is larger A) I and III B) II and IV C) II and III D) I and IV

C) not misleading Answer Explanation: It can be securities fraud to omit a material fact that is necessary to make the statements made not misleading in light of the circumstances under which they were made. Textbook Reference: Please see textbook section 9.1

In connection with the solicitation of securities, the anti-fraud rule of U.S. securities law makes it unlawful to omit a material fact necessary to make the statements made A) deceptive B) confusing C) not misleading D) understandable

A) the feasibility and revenue stream produced by the specific project financed. Answer Explanation: In revenue bonds, backing is provided by revenues for the use of the facility or project financed. It must be capable of meeting the bond's debt service obligations long-term. Textbook Reference: Please see textbook section 3.4.3

In evaluating the credit of revenue bonds, it is most relevant to evaluate A) the feasibility and revenue stream produced by the specific project financed. B) the economic health of the local or state economy. C) the taxing authority of the jurisdiction in which the project is located. D) the financial guarantee provided by the state or county standing behind the bond.

C) buy non-callable securities. Answer Explanation: The investments with the greatest call risk vulnerability are callable bonds and callable preferred stock. The best strategy for mitigating this risk is to purchase non-callable securities. Textbook Reference: Please see textbook section 7.2.1

In fixed income investing, the most reliable strategy for reducing or eliminating call risk is to A) avoid naked short calls. B) buy bonds with long maturities. C) buy non-callable securities. D) buy short puts.

D) I and III Answer Explanation: Marketability refers to the ease with which securities can be sold in the secondary market. The bonds of well-known municipalities with high credit ratings are more marketable than those issued by smaller issuers, or those with lower credit ratings. Textbook Reference: Please see textbook section 2.3.5.1

In general, which of the following bond issues would be considered more marketable? I. A bond issue of a large widely known company II. A bond issue from a small company III. A bond issue with a high credit rating IV. A bond issue with a low credit rating. A) I and IV B) II and III C) II and IV D) I and III

A) T + 1 Answer Explanation: For interest-bearing fixed income securities, interest is accrues up to (but not including) the settlement date, which is the second business day following the trade date (T+2). Put differently, accrued interest includes the trade date and T+1, but not on T+2 (settlement). On T+2, the interest accrues to the buyer of the bond. Textbook Reference: Please see textbook section 2.4

In interest-bearing corporate bonds, accrued interest that is due the seller must be included in settlement. According to industry rules, the accrued interest must be calculated up to what date? A) T + 1 B) T + 2 C) T + 3 D) T

A) T + 1 Answer Explanation: For interest-bearing fixed income securities, interest is accrues up to (but not including) the settlement date, which is the second business day following the trade date (T+2). Put differently, accrued interest includes the trade date and T+1, but not on T+2 (settlement). On T+2, the interest accrues to the buyer of the bond. Textbook Reference: Please see textbook section 2.4

In interest-bearing corporate bonds, accrued interest that is due the seller must be included in settlement. According to industry rules, the accrued interest must be calculated up to what date? A) T + 1 B) T + 3 C) T + 2 D) T

B) T + 1 Answer Explanation: For interest-bearing fixed income securities, interest is accrues up to (but not including) the settlement date, which is the second business day following the trade date (T+2). Put differently, accrued interest include the trade date and T+1, but not on T+2 (settlement). On T+2, the interest accrues to the buyer of the bond. Textbook Reference: Please see textbook section 2.4

In interest-bearing corporate bonds, accrued interest that is due the seller must be included in settlement. According to industry rules, the accrued interest must be calculated up to what date? A) T B) T + 1 C) T + 2 D) T + 3

B) T + 1 Answer Explanation: For interest-bearing fixed income securities, interest is accrues up to (but not including) the settlement date, which is the second business day following the trade date (T+2). Put differently, accrued interest includes the trade date and T+1, but not on T+2 (settlement). On T+2, the interest accrues to the buyer of the bond. Textbook Reference: Please see textbook section 2.4

In interest-bearing corporate bonds, accrued interest that is due the seller must be included in settlement. According to industry rules, the accrued interest must be calculated up to what date? A) T + 3 B) T + 1 C) T + 2 D) T

C) homeowners refinance their mortgages. Answer Explanation: When homeowners refinance their mortgages, mortgage principal is repaid to mortgage-backed securities (MBS) pools faster than anticipated. This tends to happen when interest rates are falling. Textbook Reference: Please see textbook section 7.2.7

In mortgage-backed securities, prepayment risk accelerates when A) housing prices rise. B) homeowners pay off their mortgages on schedule. C) homeowners refinance their mortgages. D) housing prices fall.

C) I and II Answer Explanation: A limited partnership must have two partners a general partner and a limited partner. The general partner has unlimited liability and is personally liable for the debts of the partnership and any lawsuits against it. Limited partners have liability that is limited to their investment and perhaps a share of the partnership's debt. The document filed with the state when the partnership is formed is the certificate of partnership. Textbook Reference: Please see textbook section 5.2

In the formation of a limited partnership, there must be I. a minimum of two partners II. general partners that are personally liable for the debts of the partnership III. limited partners that are personally liable for the debts of the partnership IV. a subscription agreement that must be filed with the state in which the partnership is organized A) I and III B) II and III C) I and II D) II and IV

D) negotiation Answer Explanation: Intimidation would least likely include negotiation. The other practices all have negative consequences for the party they are directed to. Textbook Reference: Please see textbook section 9.5.5

In the world of securities trading, intimidation would least likely include A) coercion B) harassment C) retaliation D) negotiation

D) Street name Answer Explanation: When securities are held in street name the broker-dealer is the nominal, or named, owner, and holds the securities for the benefit of the customer. Book entry is not a type of registration; it is an electronic method of tracking ownership of securities. Textbook Reference: Please see textbook section 1.6.2

In which form of registration is the broker-dealer identified as the nominal owner of the securities? A) DRS B) Book entry C) DWAC D) Street name

A) Shares are purchased at a discount from NAV and sold when the discount has narrowed Answer Explanation: A purchase of closed-end company shares is most profitable if the investor buys them at a bargain price (discount) and the discount narrows over time. In other words, the shares have grown in value while they are held. Textbook Reference: Please see textbook section 4.3.2.4

In which of these situations is the sale of closed-end company shares most profitable? A) Shares are purchased at a discount from NAV and sold when the discount has narrowed B) Shares are purchased at a premium over NAV and sold when the premium has narrowed C) Shares are purchased at a discount from NAV and sold when the discount has widened D) Shares are purchased at a premium over NAV and sold at NAV

A) Oil and gas Answer Explanation: Depletion is a tax deduction that compensates a limited partnership for using up natural resources, such as oil and gas. Real estate is not a natural resource and therefore cannot be depleted. Textbook Reference: Please see textbook section 5.2.5

In which type of limited partnership can investors enjoy depletion tax benefits? A) Oil and gas B) Real estate C) Equipment leasing D) Mortgage lending

D) Competitive bid, firm commitment Answer Explanation: If issuers want the best price for shares with the least risk of unsold shares, they should elect a competitive bidding process with a firm commitment by the underwriter. Issuers may choose a negotiated process if underwriter-selection criteria other than price (comfort, relationship) are important. Firm commitment means the underwriter buys shares from the issuer, regardless whether these shares can be resold to the public. Textbook Reference: Please see textbook section 8.3.2

In which type of underwriting is a securities issuer most likely to get the best price with the least risk? A) Negotiated underwriting, best efforts commitment B) Competitive bid, best efforts commitment C) Negotiated underwriting, firm commitment D) Competitive bid, firm commitment

A) Limit orders to buy and stop orders to sell Answer Explanation: The DNR instruction may only be used with limit orders to buy and stop orders to sell. In both cases, the specified price (limit or stop) will not be reduced on the ex-dividend date, as they otherwise would be. Textbook Reference: Please see textbook section 9.4.5

In which types of orders are specified prices reduced by the amount of dividends paid on the ex-dividend date, unless a do-not-reduce (DNR) instruction is used? A) Limit orders to buy and stop orders to sell B) Limit orders to sell and stop orders to buy C) Limit orders to buy and sell D) Limit orders and stop-limit orders to buy

D) Both equity and mortgages Answer Explanation: A REIT is an investment company that specializes in owning real estate properties (equity) or debt instruments (mortgages). They have a tax favored structure that helps real estate investors avoid double-taxation of dividends. Textbook Reference: Please see textbook section 5.1.4

In which types of real estate may real estate investment trusts (REITs) invest? A) Mortgages only B) Raw land only C) Equity only D) Both equity and mortgages

B) Are non-binding on the client Answer Explanation: Indications of interest are always considered to be non-binding indications. Clients do not provide any funds at this point. Textbook Reference: Please see textbook section 8.1.2

Indications of interest provided by clients of a broker-dealer A) Must be forwarded to the issuer B) Are non-binding on the client C) Are deposited into an escrow account pending the completion of the offering. D) Must be accompanied by a deposit of 1% of the total purchase price

D) Federal Farm Credit Banks Answer Explanation: Interest on bonds issued by the Federal Farm Credit Banks is taxed like interest on government securities. It is taxable at the federal level, but exempt at the state level. Textbook Reference: Please see textbook section 3.5

Interest on all of the following bonds is fully taxable at the federal, state and local level EXCEPT A) Government National Mortgage Association B) Federal Home Loan Mortgage Corporation C) Federal National Mortgage Association D) Federal Farm Credit Banks

C) I and IV Answer Explanation: If the supply of money is tight interest rates will increase. This happens when the demand for money has increased. Textbook Reference: Please see textbook section 10.4.3

Interest rates are likely to rise if I. The demand for money increases II. The supply for money increases III. The demand for money decreases IV. The supply for money decreases A) II and IV B) II and III C) I and IV D) I and III

A) semiannually Answer Explanation: According to the Investment Company Act of 1940, financial statements are required to be sent to shareholders on a semiannual basis at the minimum. Textbook Reference: Please see textbook section 4.2.1

Investment company financial statements are sent to shareholders A) semiannually B) annually C) monthly D) quarterly

Answer Explanation: Non-systematic risk can often be managed through a process of diversification. Textbook Reference: Please see textbook section 1.3.2

Investors who are concerned about non-systematic risk may try to A) Diversify their portfolio B) Hedge their portfolio C) Liquidate their portfolio D) Balance their portfolio

C) closed-end investment company Answer Explanation: When the net asset value is higher than the public offer price, this means the product is selling at a discount. This is most likely to occur with a closed-end investment company. With a traditional open-end investment company, the net asset value will be lower than the public offering price. Textbook Reference: Please see textbook section 4.3.2.2

Jim is checking the financial page of a website and notices that the net asset value of a product is higher than the public offer price of the product. The product that Jim is looking at is most likely a (an) A) master limited partnership B) variable rate demand note C) closed-end investment company D) open-end investment company

A) Until the end of the trading day Answer Explanation: In secondary market trading for retail accounts, most bond orders are day orders that expire at the end of the trading day, if they are not filled. If any part of an order is filled, the rest of the order generally is cancelled. Textbook Reference: Please see textbook section 9.4.3

Margaret, a retail investor, places an order with her broker to buy 10 corporate bonds on the secondary market. If no dealer is able to fill this order, how long will it generally stay in effect? A) Until the end of the trading day B) One week C) Until cancelled by the customer D) Three trading days

B) TIPS Answer Explanation: TIPS (Treasury Inflation-Protected Securities) are marketable inflation indexed bonds that are issued by the U.S. Treasury. Their principal is adjusted to the Consumer Price Index and is multiplied by a constant coupon to generate an interest payment that protects the holder against inflation. Series I Bonds are non-marketable savings bonds that have a variable coupon rate reset every 6 months based on the current inflation rate. Textbook Reference: Please see textbook section 3.2.1.4

Marketable U.S. government instruments that have their principal amounts adjusted to the Consumer Price Index to protect the holder against inflation are called A) SLGs B) TIPS C) Series I Bonds D) STRIPs

B) II and III Answer Explanation: Existing securities are bought and sold in the secondary market. Secondary market transactions can take place either on exchanges or over-the-counter

Markets that are characterized by investors buying and selling existing securities include the I. Primary market II. Secondary market III. Over-the-counter market IV. New issue market A) I and III B) II and III C) II and IV D) I and IV

A) Just prior to the close of trading for the day Answer Explanation: Marking the close occurs when a trader attempts to manipulate the closing price of a stock by placing an order just prior to the close of trading. Textbook Reference: Please see textbook section 9.5.10

Marking the close occurs when traders place orders A) Just prior to the close of trading for the day. B) During the day, to be executed at the closing price. C) After the markets have closed for the day. D) After the markets have closed, to be executed at the open on the next trading day

D) An ownership interest in properties held within the portfolio Answer Explanation: Mortgage REITs offer an ownership interest in mortgages held within a portfolio, not the actual properties. Investors in mortgage REITs own shares that pay relatively high dividends, which provide an income stream to investors. Because mortgage REITs provide financing for homeowners and commercial entities, investors help support the recovery of housing markets and overall economic growth. Textbook Reference: Please see textbook section 5.1.4

Mortgage REITs offer investors the potential for all of the following EXCEPT A) Dividends that are paid each year B) A steady income stream C) The opportunity to participate in the recovery of housing markets and overall economic growth D) An ownership interest in properties held within the portfolio

D) a summary prospectus. Answer Explanation: Mutual fund investors must be given a summary prospectus at or prior to the time of the first purchase in a fund. It is a compilation of highlights from the longer prospectus. A summary prospectus includes the fund's investment objectives, fee structure, and other pertinent information. Textbook Reference: Please see textbook section 4.2.1

Mutual fund investors generally are given a disclosure document before they make their first investment. It is called A) a statement of condition. B) a statutory prospectus. C) a red herring. D) a summary prospectus.

D) Endorse the certificates to a brokerage firm Answer Explanation: Endorsing stock certificates to a brokerage firm transfers ownership into street name. The brokerage firm maintains a record of ownership, and the investor may sell the stock without the need to deliver a paper certificate. Textbook Reference: Please see textbook section 1.6.2

Nigel owns stock certificates that he inherited from his grandfather. How can he continue to hold the stock without having responsibility for lost or damaged certificates? A) Sell the certificates to a trust B) Register the certificates with the Secretary of State C) Convert the certificates to registered form D) Endorse the certificates to a brokerage firm

B) Mortgage REIT Answer Explanation: A mortgage REIT is generally more leveraged than equity REITs. Derivative and options strategies are frequently used to protect the portfolio assets and lessen portfolio volatility. Textbook Reference: Please see textbook section 5.1.4

Of the REITs available for customer purchase, which is generally the most leveraged, and relies on options strategies and hedging in the management of its portfolio? A) Hybrid REIT B) Mortgage REIT C) Balanced REIT D) Equity REIT

A) Mortgage REIT Answer Explanation: Mortgage REITs invest in both commercial and residential real estate mortgages, and pay investor interest from these mortgages. Ginnie Mae and Fannie Mae are invested in residential housing only. Structured products are not commonly associated with real estate investment trusts. Textbook Reference: Please see textbook section 5.1.4

Of the following investment options, which is invested in mortgages of both commercial and residential real estate? A) Mortgage REIT B) Structured Products C) FNMA D) GNMA

B) Aaa Aaa is the highest rating that Moody's assigns. To further differentiate between categories, Moody's also uses the numbers 1 -3 for ratings other than Aaa. For example, an Aa1 is stronger in credit quality than an Aa2. Textbook Reference: Please see textbook section 2.3.5.1

Of the following ratings, which indicates the strongest credit quality? A) Aa1 B) Aaa C) A D) A1

A) Ginnie Mae securities Answer Explanation: Ginnie Mae securities (GNMA) are backed in full by the U.S. government, so offer the greatest safety of principal of the choices provided. Textbook Reference: Please see textbook section 3.3.1

Of the following, an investor seeking safety of principal would find which of the following most appropriate? A) Ginnie Mae securities B) Freddie Mac securities C) Fannie Mae Securities D) Federal Home Loan Bank securities

D) 18 days Answer Explanation: The calculation of accrued interest includes interest on the prior payment date up to, but not including the settlement date. Municipal bond accrued interest is calculated based on 30-day months. If you start counting on the 15th of a 30 day month, there are 16 days of interest. There are 2 additional days in February for a total of 18 days of interest. Textbook Reference: Please see textbook section 2.4

On February 1st a customer purchases a municipal bond for settlement on February 3rd. The bond pays semi-annual interest on January 15 and July 15. How many days of accrued interest are added to the buyer's price? A) 19 days B) 33 days C) 20 days D) 18 days

A) 94 days Answer Explanation: Regular way settlement for municipal bonds is T+2 business days, and the accrued interest calculation is based on 30-day months. There are 30 days in June, 30 days in July, 30 days in August, and 4 in September due to the weekend (settlement date is Tuesday September 5th). The buyer's price includes interest that goes up to, but does not include the settlement date. Textbook Reference: Please see textbook section 2.4

On Friday September 1st a customer purchases a municipal bond for regular way settlement. The bond pays semi-annual interest on December 1 and June 1. How many days of accrued interest are added to the buyer's price? A) 94 days B) 95 days C) 93 days D) 96 days

C) Friday, Jan 13 Answer Explanation: Cash settled trades settle on the same day. Therefore, an investor could buy stock on the record date and still settle in time to receive the dividend. Therefore, the ex-dividend date for a cash settled trade will be the business day after the record date. Textbook Reference: Please see textbook section 1.7.1

On Monday, January 2nd, ABC Inc. declares a $0.10 dividend payable on Monday, Jan 16 to all shareholders of record as of Thursday, Jan 12. When will be the ex-dividend date for cash settled trades in the security? A) Tuesday, Jan 10 B) Wednesday, Jan 11 C) Friday, Jan 13 D) Thursday, Jan 12

B) Wednesday, Jan 11 Answer Explanation: For regular way trades, the ex-dividend date is one business day before the record date. Investors who buy the stock two business days before the record date will receive the dividend. Investors who purchase the stock on or after the ex-dividend date will not receive the dividend. Textbook Reference: Please see textbook section 1.7

On Monday, January 2nd, ABC Inc. declares a $0.10 dividend payable on Monday, Jan 16 to all shareholders of record as of Thursday, Jan 12. When will be the ex-dividend date for regular way trades in the security? A) Tuesday, Jan 10 B) Wednesday, Jan 11 C) Thursday, Jan 12 D) Friday, Jan 13

C) systematic risk. Answer Explanation: Systematic risk reflects that the performance of an individual security will be impacted by the performance of the stock market as a whole. Textbook Reference: Please see textbook section 7.2.11

On a day when the Dow Jones Industrial Average loses 3%, market analysts expect most individual US stocks to lose value because of A) interest rate risk. B) business risk. C) systematic risk. D) political risk.

D) whether a second broker-dealer was used. Answer Explanation: For interpositioning to occur, a second broker-dealer must be used in a way that denies the customer best execution. Textbook Reference: Please see textbook section 9.5.1.1

One test for interpositioning is A) whether the mark-up was fair and reasonable. B) how well trade details were fully disclosed. C) whether the order was executed in full and on a timely basis. D) whether a second broker-dealer was used.

C) They issue a single class of shares Answer Explanation: Open-end companies commonly issue A, B and C shares which reflect different types of sales charges. Closed-end funds issue one type of share class only. Textbook Reference: Please see textbook section 4.6

Open-end and closed-end company investments share all of the following characteristics EXCEPT A) Shareholders own an undivided interest in all securities with the portfolio B) Professionally managed by an investment manager subject to registration under the Investment Company Act of 1940 C) They issue a single class of shares D) The NAV per share is calculated by subtracting the fund liabilities from the fund's assets and dividing by the number of shares outstanding

C) supervised Answer Explanation: Exchange-traded funds are supervised, usually by a trustee on behalf of the fund. Textbook Reference: Please see textbook section 4.6

Open-end funds are actively managed while exchange-traded funds are A) verified B) monitored C) supervised D) reviewed

D) Maximize order flow rebates to the firm. Answer Explanation: Order-splitting, or trade-shredding, may be deemed a prohibited business practice if done with the intention of increasing order flow rebates to the firm. These are profits that the firm is trying to capture by exploiting its customer orders. Textbook Reference: Please see textbook section 9.5.2

Order-splitting, or trade-shredding, may be deemed a prohibited business practice if the intent is to A) Process client orders using advanced technology. B) Promote enhanced liquidity for customer orders. C) Facilitate the execution of client orders. D) Maximize order flow rebates to the firm

A) limit orders but not stop orders. Answer Explanation: Limit orders may receive partial execution, owing to the fact that a trader may only be able to fill a portion of an order at a particular price. Stop orders become market orders once they are triggered and therefore must be executed in their entirety. Textbook Reference: Please see textbook section 9.4.4

Partial executions are possible with A) limit orders but not stop orders. B) both limit and stop orders. C) stop orders but not limit orders. D) stop orders and orders marked "GTC".

B) Passive gains Answer Explanation: Passive losses in a DPP may only be used to offset passive gains. Textbook Reference: Please see textbook section 5.2

Passive losses in a DPP may be used to offset A) Dividend income B) Passive gains C) Ordinary income D) Capital gains

B) Industrialized and developing countries Answer Explanation: Political risk can be encountered in both highly industrialized counties as well as in developing countries. Textbook Reference: Please see textbook section 7.2.9

Political risk may be encountered in A) Only the most under developed countries B) Industrialized and developing countries C) Industrialized countries only D) Developing countries only

D) having a claim on corporate assets before common stockholders if the corporation is dissolved Answer Explanation: Preferred stockholders receive dividends before common stockholders, preferred dividends are based on a percentage of par value (usually $100), and have a claim on assets before common stockholders. Textbook Reference: Please see textbook section 1.5.1.2

Preferred stockholders are entitled to certain rights, including A) receiving dividends based on a specified percentage of the current market value of the stock B) the right to vote for directors C) receiving dividends after common stockholders D) having a claim on corporate assets before common stockholders if the corporation is dissolved

C) Individuals who will be retiring in the next two years Answer Explanation: The investment objective of income preservation is common amongst retirees and those approaching retirement. Textbook Reference: Please see textbook section 7.3.1

Preservation of capital is a common investment objective, found most frequently amongst A) International investors B) Individuals who graduated from college within the past five years C) Individuals who will be retiring in the next two years D) College students

C) the quiet period Answer Explanation: The SEC mandates a quiet period to keep companies from building hype surrounding public offerings of securities, beyond information they disclose in public filings. Violating quiet-period requirements can result in disciplinary action, and it also can cause delays in the offering. Textbook Reference: Please see textbook section 8.1.1

Prior to an Initial Public Offering, a company enters a period when it is prohibited from releasing new material information to the public without amending its registration and prospectus. This time frame is known as A) the blackout period B) the cone of silence C) the quiet period D) the restricted period Answer Explanation: The SEC mandates a quiet period to keep companies from building hype surrounding public offerings of securities, beyond information they disclose in public filings. Violating quiet-period requirements can result in disciplinary action, and it also can cause delays in the offering. Textbook Reference: Please see textbook section 8.1.1

A) Those that file with the SEC and whose shares trade on a stock exchange Answer Explanation: For a REIT to be publicly-traded, as with any entity, it must file with the SEC and its shares must be listed on a public stock exchange. Most REITs are listed on the New York Stock Exchange. Textbook Reference: Please see textbook section 5.1.3

Publicly-traded REITs refer to which of the following? A) Those that file with the SEC and whose shares trade on a stock exchange B) Those that file with the SEC and whose shares do not trade on a stock exchange C) Those that do not file with the SEC and whose shares do not trade on a stock exchange D) Those that do not file with the SEC and whose shares trade on a stock exchange

B) 0.9 Answer Explanation: To qualify as a REIT, a U.S. company must distribute at least 90% of its net income to shareholders as dividends. Textbook Reference: Please see textbook section 5.1.1

REITs are required to distribute what percentage of their net income to shareholders? A) 0.5 B) 0.9 C) 0.75 D) 1

A) Common stock, preferred stock, and debt securities Answer Explanation: REITs may raise capital through issuing a variety of securities. Usually investors can purchase common stock, preferred stock or debt securities of publicly traded REITs. Textbook Reference: Please see textbook section 5.1.3

REITs issue which of the following types of securities? A) Common stock, preferred stock, and debt securities B) Common stock and preferred stock only C) Common stock and debt only D) Common stock only

C) carry no credit risk but are subject to purchasing power and interest rate risk. Answer Explanation: Treasury bonds do not carry credit risk (as the US Government can print money), but they do carry purchasing power (inflation) and interest rate risk. Textbook Reference: Please see textbook section 2.3.5

Regarding Treasury securities, they A) are subject to credit risk and purchasing power risk, but not interest rate risk. B) are exempt from purchasing power risk, but are subject to credit risk and interest rate risk. C) carry no credit risk but are subject to purchasing power and interest rate risk. D) are subject to all of the same risks as any other fixed-income security.

D) Yes, because partial advance knowledge of a block trade is enough Answer Explanation: Partial knowledge of an imminent block trade can be enough to trigger front-running, if it is material and non-public and the trader has knowledge that the transaction will be agreed upon imminently. The source of the information is irrelevant. Textbook Reference: Please see textbook section 9.5.7

Registered Rep G is walking down the hall of his firm and hears somebody whisper on the phone "block buy of ABC Co. tomorrow." He doesn't know any details about the trade, such as buyer or quantity. But he decides to buy a few shares for his own account anyway, because there has not been any public word about such a block trade. Is he front-running? A) No, because the source of the information is not an insider B) Yes, because the information came from within his own firm C) No, because his trade is not based on solid information D) Yes, because partial advance knowledge of a block trade is enough

D) Event notices Answer Explanation: Mandated reports of continuing disclosure information are reported to the MSRB through event notices. Textbook Reference: Please see textbook section 8.4.2.2

Required updates that disclose material information from state and local governments and other parties are called A) Statements of additional information B) Focus reports C) Official notices D) Event notices

C) acquired in the open market or in a private placement Answer Explanation: Investors traditionally are granted or receive restricted securities through private placement offerings, Regulation D offerings, Employee Stock Ownership Plans (ESOPs), as compensation for professional services, or in exchange for providing venture capital funding. Control securities are owned by a corporate insider and can be acquired either via a private sale or in the open market. Textbook Reference: Please see textbook section 8.2.4

Restricted and control securities under Rule 144 are A) acquired only in private placements B) Acquired only through exchange offers C) acquired in the open market or in a private placement D) acquired only via open market transactions

B) Refunding Answer Explanation: When issuers sell new bonds to retire an outstanding bond issue they are engaged in refunding. Pre-refunding or advance refunding occur if the issuers sells the new bonds in advance of the first available call date, typically to lock in a lower interest rate. Textbook Reference: Please see textbook section 2.1.9

Retiring an outstanding bond issue at maturity by using money from the sale of a new offering is known as A) Serial Retirement B) Refunding C) Redeeming D) Restructuring

A) An agency that provides a free service to the municipality Answer Explanation: Revenue bonds may be issued by political entities or government agencies that generate operating expenses or revenues. They cannot be issued by agencies that supply free services, because general tax dollars are not available to pay debt service. Textbook Reference: Please see textbook section 3.4.2

Revenue bonds may be issued by all of the following EXCEPT A) An agency that provides a free service to the municipality B) A city that wants to build a new event venue to host concerts and athletic events C) A public transportation provider in an urban area D) A public housing program supplying government sponsored housing for elderly citizens

C) I and II Answer Explanation: Rule 144 allows public resale of restricted and control securities if a number of conditions are met. Restricted securities are those securities that have been acquired through a private placement or other exempt transaction (i.e. Regulation S for overseas offerings), and are not registered. Control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as a director or large shareholder, in a relationship of control with the issuer. Control securities are not always subject to a holding period. They must satisfy a holding period only if they are also restricted. Securities acquired by non-affiliates through an open market transaction are neither restricted nor control stock, and are not subject to Rule 144. Textbook Reference: Please see textbook section 8.2.4

Rule 144 applies to the sale of securities that I. were acquired by investors through unregistered, private transactions II. are considered control securities because they are held by an affiliate of the issuer III. were acquired by non-affiliates through an open market transaction IV. must under all circumstances satisfy a holding period before they can be sold A) II and IV B) II and III C) I and II D) I and IV

A) I and II Answer Explanation: Rule 144 allows public resale of restricted and control securities if a number of conditions are met. Restricted securities are those securities that have been acquired through a private placement or other exempt transaction (i.e. Regulation S for overseas offerings), and are not registered. Control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as a director or large shareholder, in a relationship of control with the issuer. Control securities are not always subject to a holding period. They must satisfy a holding period only if they are also restricted. Securities acquired by non-affiliates through an open market transaction are neither restricted nor control stock, and are not subject to Rule 144. Textbook Reference: Please see textbook section 8.2.4

Rule 144 applies to the sale of securities that I. were acquired by investors through unregistered, private transactions II. are considered control securities because they are held by an affiliate of the issuer III. were acquired by non-affiliates through an open market transaction IV. must under all circumstances satisfy a holding period before they can be sold A) I and II B) I and IV C) II and IV D) II and III

D) An exemption from the '33 Act and permits the resale of restricted or control securities to the public Answer Explanation: SEC Rule 144 provides a safe harbor permitting the sale of restricted and affiliate securities, in limited amounts without requiring registration of the securities sold. Textbook Reference: Please see textbook section 8.2.4

Rule 144 provides which of the following? A) An exemption from reporting requirements for issuers with foreign subsidiaries B) Federal guidelines for lending standards to private companies C) Guidelines for the communication between public companies and PIPE investors D) An exemption from the '33 Act and permits the resale of restricted or control securities to the public

B) I, II and III Answer Explanation: Although certain securities are exempt from registration with the SEC, no securities are exempt from anti-fraud provisions, and rules against such fraudulent practices as manipulation or omission of material information apply to the sale of these securities. Textbook Reference: Please see textbook section 9.1

Rules against fraud, manipulation or omission in the sale of securities apply to I. Pink sheets stocks II. U.S. government securities exempt from registration III. Private placements A) II and III only B) I, II and III C) I and II only D) I and III only

C) restricted stock Answer Explanation: SEC Rule 144 provides an exemption for restricted stock. Restricted stock is stock that has not been registered. It may have been issued through a private placement or an employee stock-ownership plan. Textbook Reference: Please see textbook section 8.2.4.1

SEC Rule 144 provides an exemption from registration for A) municipal bonds B) preferred stock C) restricted stock D) securities issued by banks

C) Reclassification of an issuer's securities.

SEC Rule 145 addresses the A) Documentation standards that must be satisfied as part of federal books and records requirements. B) Financial requirements that an issuer must satisfy prior to proceeding with a public offering. C) Reclassification of an issuer's securities. D) Trading of an issuer's shares in the secondary market.

C) the following business day Answer Explanation: Transactions in Treasury securities and option contracts settle on the business day following the transaction date. Textbook Reference: Please see textbook section 2.4

Secondary market transactions in Treasury securities and option contracts settle A) the same business day B) two business days later C) the following business day D) three business days later

D) quoted by market makers Answer Explanation: A market maker determines whether to quote a Pink Sheets security, and initiates quotations by submitting Form 211 to FINRA. It is possible for a market maker to quote securities in the Pink Sheet Quote system without the knowledge or permission of the issuer of the securities. Pink Sheet Securities are not always registered with the SEC, and are often thinly traded. All OTC equity securities are required to report last sale and trading volume information. Textbook Reference: Please see textbook section 9.3.4.2 KnopmanMarks http://testprep.knopman.com SIE Exam - 5/26/2021 9:02 PM 5 of

Securities that are included in the Pink OTC Markets are A) typically traded actively B) not required to report last sale and trading volume information C) registered with the SEC D) quoted by market makers

D) Long-term capital appreciation and diversification Answer Explanation: Private equity funds are long-term investments that may require holding periods of 10 years or more, and their main objective is capital appreciation. A second objective is diversification, and this is achieved in two ways. Over time, private equity funds can produce different streams of returns than stocks and bonds. They also help investors diversify among the majority of companies in the US that are not public. Textbook Reference: Please see textbook section 5.4.2

Some of the largest universities in the United States are investing 10% or more of their endowments in private equity funds. What do their investment objectives tend to be? A) Current income and liquidity B) Tax-sheltered growth and income C) Safety and liquidity D) Long-term capital appreciation and diversification

D) A high-net-worth-investor Answer Explanation: Speculation may be an investment objective of a high-net-worth-investor, who will have the ability to sustain economic risks. Textbook Reference: Please see textbook section 7.3.6

Speculation is a common investment objective of A) Retired individuals B) An individual with modest assets C) A small business owner with ten employees D) A high-net-worth-investor

B) I and IV Answer Explanation: In general, yield spreads increase during periods of recession and decrease during periods of expansion. When the spread is wide between bonds of different quality ratings, investors can conclude that the market is factoring more risk of default on the lower grade bonds, which implies that the economy is slowing down. The increased spread indicates that the market is predicting a greater risk of default. Textbook Reference: Please see textbook section 10.2.4

Spreads are narrowing between bonds of different quality ratings. Which two of the following is true? I. The economy is strengthening II. The economy is slowing down III. The market is forecasting greater risk of default on low grade bonds IV. Low grade bonds are projected to have less risk of default. A) I and III B) I and IV C) II and III D) II and IV

C) The bonds are called by the issuer Answer Explanation: Bonds can be repaid prior to their stated maturity date if they are called by the issuer. Textbook Reference: Please see textbook section 2.1.8.1

Term, or dollar bonds, mature at a specified date in the future, commonly known as the maturity date. Term bonds can also be repaid prior to maturity if A) The company's stockholders approve the action. B) If the company charter has a provision for early repayment of the bonds. C) The bonds are called by the issuer. D) The CEO of the company authorizes early retirement of the debt.

B) net asset value (NAV) decreases by the amount of the dividend. Answer Explanation: When a mutual fund pays a dividend, the net asset value (NAV) decreases by the amount of the dividend. Textbook Reference: Please see textbook section 4.2.5

The ABC mutual fund will pay a $1.00 cash dividend to its shareholders. As a result of this event, the A) number of shares outstanding decreases. B) net asset value (NAV) decreases by the amount of the dividend. C) Net asset value remains the same. D) Public offer price decreases by the amount of the distribution. Answer Explanation: When a mutual fund pays a dividend, the net asset value (NAV) decreases by the amount of the dividend. Textbook Reference: Please see textbook section 4.2.5

C) The customer may buy or sell shares at a price higher or lower than $10 Answer Explanation: The calculation of NAV of a closed-end fund is NAV = Fund Asset Fund Liabilities/number of outstanding shares. NAV serves primarily as a benchmark for share value. Shares are actually bought and sold by supply and demand through exchange trading. Their price may be higher or lower than the NAV. Textbook Reference: Please see textbook section 4.3.2.2

The NAV of a closed-end company share is calculated at $10 per share. In this case, A) The customer will sell shares for $10 if the order was placed before the close of business B) The customer will sell shares at the NAV of $10 plus the sales charge C) The customer may buy or sell shares at a price higher or lower than $10 D) The customer will purchase shares for $10 if the order was placed before the close of business

B) The fund receives interest from bonds that are held within the portfolio Answer Explanation: The NAV of mutual fund shares increases when the value of securities held in the portfolio increases, when the portfolio receives distributions of dividends or interest from securities it owns, or when it sells portfolio securities at a profit. There is no change to NAV when new shares are issued or when shares are redeemed. The NAV of shares falls when the fund makes dividend or capital gains distributions. Textbook Reference: Please see textbook section 4.2.4

The NAV of mutual fund shares will increase in which of the following circumstances? A) Outstanding shares are redeemed B) The fund receives interest from bonds that are held within the portfolio C) Capital gains of the fund are distributed D) Shareholders reinvest dividend and capital gains distributions

D) negotiated market Answer Explanation: Nasdaq is a negotiated market where market makers negotiate a price with other customers and broker dealers. The other type of market important for the exam is an auction market, which is where securities trade on an exchange floor, such as the NYSE. Textbook Reference: Please see textbook section 9.3.3.1

The Nasdaq market is a(n) A) auction market B) transfer market C) double-auction market D) negotiated market

A) Equity REIT Answer Explanation: Equity REITs pay dividends to investors on an annual basis which come from rental income from properties that are in the pool or gains when properties are sold at a profit. Textbook Reference: Please see textbook section 5.1.4

The REIT that earns all of the income it passes to investors from property rentals and from gains on property sales is the A) Equity REIT B) Hybrid REIT C) Mortgage REIT D) Balanced REIT

A) buying penny stocks Answer Explanation: Remember the three prohibited activities for mutual funds: selling short, buying on margin, and participating in joint investment or trading accounts. Textbook Reference: Please see textbook section 4.2.3

The SEC restricts mutual funds from engaging in all of the following activities except A) buying penny stocks. B) participating in joint trading accounts. C) buying securities on margin. D) selling securities short.

A) Rule 147 Answer Explanation: Rule 147 offers an intrastate offering exemption from Section 3(a)(11) of the Securities Act of 1933. Textbook Reference: Please see textbook section 8.2.2

The SEC rule that provides an exemption from the registration requirements of the Securities Act of 1933 for intrastate offerings is A) Rule 147 B) Regulation A C) Rule 144A D) Rule 144

A) non-marketable US Government bond paying a combination of fixed interest and a variable return. Answer Explanation: Series I bonds are US Government bonds which pay both a fixed and variable rate of interest. They do not trade in the secondary market. Textbook Reference: Please see textbook section 3.2.1

The Series I bond is best described as a A) non-marketable US Government bond paying a combination of fixed interest and a variable return. B) marketable US Government bond paying a variable rate of interest. C) non-marketable US Government bond paying a variable rate of interest as an inflation hedge. D) US Government bond issued at a discount and matures at par.

A) Below par value Answer Explanation: When the yield to call of a bond is higher than the yield to maturity of that bond, the bond is trading at a discount. Textbook Reference: Please see textbook section 2.2.5

The Town of X bond carries a YTM of 2.50% and a yield to call of 2.75%. This bond is currently trading A) Below par value B) At par value C) 25 basis points above $1,000 D) Above par value

B) Foreign U.S. dollar investment and currency holdings Answer Explanation: Foreign investment in the U.S. (and denominated in dollars), as well as direct foreign holdings of U.S. currency, more than compensate for the BOT deficit. Textbook Reference: Please see textbook section 10.4

The U.S. chronically runs a large balance of trade (BOT) deficit. Meanwhile, the U.S. dollar has often been strong against foreign currencies. Why is this so? A) Interest rates B) Foreign U.S. dollar investment and currency holdings C) A BOT deficit helps to support a strong currency D) Capital controls

B) I and III Answer Explanation: The deficit typically increases when demand for foreign products rises. This results when the value of the dollar is strong against foreign currency. To counteract the strong U.S. dollar the FED may actually attempt to weaken its value by purchasing foreign currency (selling dollars). This is also accomplished when the FED injects more money into the economy (purchasing securities) or by lowering interest rates. These actions help make our goods less expensive to foreign customers. Textbook Reference: Please see textbook section 10.4.3

The U.S. deficit has been steadily increasing. Which of the following are likely? I. U.S demand for foreign products is increasing II. U.S. Demand for foreign products is decreasing III. The Fed may purchase foreign currency to stabilize the value of the dollar IV. The Fed may sell foreign currency to stabilize the value of the dollar. A) II and IV B) I and III C) I and IV D) II and III

C) Is based on actual-day months Answer Explanation: For government bonds, interest starts accruing on the interest payment date before settlement. Interest payable on the settlement date is not included. Dated date applies only to new issues of municipal bonds. Government bond interest is based on actual-day months. Accrued interest is added to the price paid by the purchaser and received by the seller. Textbook Reference: Please see textbook section 2.4

The accrued interest that is calculated for settlement of a Treasury bond A) Starts on the dated date. B) Includes interest paid on the settlement date. C) Is based on actual-day months. D) Is subtracted from the purchase price. Answer Explanation: For government bonds, interest starts accruing on the interest payment date before settlement. Interest payable on the settlement date is not included. Dated date applies only to new issues of municipal bonds. Government bond interest is based on actual-day months. Accrued interest is added to the price paid by the purchaser and received by the seller. Textbook Reference: Please see textbook section 2.4

B) Expense ratio Answer Explanation: A closed-end fund's expense ratio reflects the costs of ownership in the fund as a percentage of the net asset value. It is included in the fund's prospectus. Textbook Reference: Please see textbook section 4.3.2.3

The administrative costs of ownership in a closed-end fund are included in the fund's A) Management fee B) Expense ratio C) 12b-1 charges D) Surrender charges

D) CMOs Answer Explanation: CMOs were created to minimize the negative impacts of prepayment and extension risk. Textbook Reference: Please see textbook section 3.3.2

The adverse impacts of prepayment and extension risk may be mitigated through the use of A) Treasury Receipts B) ADRs C) GNMAs D) CMOs

C) The syndicate members Answer Explanation: The agreement among underwriters sets forth terms for and is signed by the syndicate members. Textbook Reference: Please see textbook section 8.3.4.1

The agreement among underwriters is signed by A) The issuer and the syndicate manager B) Selling group members C) The syndicate members D) Bond counsel

B) market value. Answer Explanation: Par value, also known as face value or principal value, is the amount a bondholder will receive at maturity. It is not the same as market value, which is what the bond is worth now if sold on the open market. Textbook Reference: Please see textbook section 2.1.2

The amount of principal a bond investor can expect to be repaid at maturity can be called any of the following except A) par value. B) market value. C) principal value. D) face value

C) I, II and III Answer Explanation: The Securities Exchange Act of 1934 forbids fraud in securities transactions, and applies to both securities that are subject to the registration requirements of the Securities Act of 1933 and to those that are exempt, such as government and municipal securities. The anti-fraud provisions also apply to firms that sell municipal securities or engage in other exempt transactions. Textbook Reference: Please see textbook section 9.1

The anti-fraud provisions of the Securities Exchange Act of 1934 apply to I. Representatives who sell government securities II. Firms that sell municipal securities III. Exempt transactions A) I only B) I and II only C) I, II and III D) II and III only

D) $36.47 Answer Explanation: The spread is the difference between the best bid and ask prices currently available on the limit order book. The best bid is almost always below the best ask. In this case, the quote would be $36.45 bid/$37.47 ask. Textbook Reference: Please see textbook section 9.4.3

The best bid currently available to buy ABC stock is $36.45 per share. If the spread is 2 cents per share, what is the best ask price, as shown on the limit order book? A) $36.45 B) $36.43 C) It can't be determined D) $36.47

D) As favorable as possible Answer Explanation: The best execution obligation is met when the member uses reasonable diligence to ascertain the best market and then trades so that the resultant price is as favorable as possible to the customer. Textbook Reference: Please see textbook section 9.5.1

The best execution obligation requires a member firm to obtain what price for a customer under prevailing market conditions? A) Satisfactory to the customer B) The most competitive C) Reasonable given the nature of the trade D) As favorable as possible

D) choose non-callable bonds. Answer Explanation: Investors who are concerned with call protection should focus on buying non-callable bonds i.e., those that cannot be called by the issuer prior to maturity. Textbook Reference: Please see textbook section 2.3.2

The best way a bond investor can achieve call protection is to A) choose bonds with high coupons. B) hold the bond until maturity. C) choose only the highest quality bonds. D) choose non-callable bonds

C) a decline in broad stock market indexes. Systematic risk reflects that the performance of an individual security will be impacted by the performance of the stock market as a whole i.e., broad stock market indexes. Textbook Reference: Please see textbook section 7.2.11

The best way to know when systematic risk is increasing is to watch out for A) increased trading volume. B) a decline in the smallest and most vulnerable stocks. C) a decline in broad stock market indexes. D) a decline in interest rates.

B) Is a benchmark for the trading price of the shares which is set by supply and demand Answer Explanation: Closed-end fund shares trade on exchanges, and their prices are established by supply and demand. The NAV calculation, while not required to be made daily, establishes a benchmark for the value of the shares which trade at a premium or discount to the NAV. Textbook Reference: Please see textbook section 4.3.2.2

The calculation of NAV by a closed-end fund A) Determines the price at which an investor sells shares of the fund B) Is a benchmark for the trading price of the shares which is set by supply and demand C) Determines the price at which an investor purchases shares of the fund D) Is required to take place at the close of business on each day

C) I and IV Answer Explanation: Hedge fund managers generally charge a management fee of 1-2% of the assets under management plus 20% of the fund's profits. Textbook Reference: Please see textbook section 5.3

The compensation to a hedge fund manager is typically I. 1 2% of the assets under management II. 5% of the assets under management III. 10% of the fund profits IV. 20% of the fund profits A) I and III B) II and III C) I and IV D) II and IV

C) When the SEC declares the registration effective Answer Explanation: The waiting period is defined by the registration statement and effectiveness. It begins with the filing and ends when the SEC declares the registration effective. During this time, the issuer and related parties may communicate with the public to gauge the demand for the offering. Textbook Reference: Please see textbook section 8.1.3

The cooling off period after the filing of a registration statement ends A) upon final pricing of the offering B) 30 days after the registration statement is filed, unless extended by the SEC C) When the SEC declares the registration effective D) upon completion of the offering

B) conversion value Answer Explanation: The conversion value is the current value of the bond if it is was converted today. This is calculated as the conversion ratio multiplied by the issuer's current stock price. This value is theoretically the minimum amount that an investor could receive for each $1,000 par value bond. The conversion ratio is the number of shares of stock that can be exchanged for each bond. The conversion premium is the spread between the market price of the convertible bond and the price at which it can be converted, expressed as a percentage. The conversion price is the price at which a convertible bond can be converted into shares of the company's stock.

The current value of a convertible bond if it were converted today is known as its A) conversion ratio B) conversion value C) conversion price D) conversion premium

B) current price Answer Explanation: Current yield is calculated as the sum of the annual coupons (the numerator) divided by current price (the denominator). Textbook Reference: Please see textbook section 2.2.2

The denominator in the calculation of a bond's current yield is A) maturity in years. B) current price. C) annual coupons. D) face value.

D) Trust Indenture Answer Explanation: The organization of the UIT is explained and initiated with the drafting of the Trust Indenture. Textbook Reference: Please see textbook section 4.4

The document that initiates the formation of a unit investment trust is the A) Organizational Charter B) S-1 Registration Statement C) Subscription Agreement D) Trust Indenture

B) Partnership Agreement Answer Explanation: A limited partnership's partnership agreement identifies the general partner and the roles of the limited partners. It also identifies the circumstances for the dissolution or termination of the partnership to take place. Textbook Reference: Please see textbook section 5.2.2

The document that specifies the circumstances under which a limited partnership may be terminated or dissolved is the A) Certificate of Limited Partnership B) Partnership Agreement C) Subscription Agreement D) Sharing Arrangement

D) The documents collected to support the determination of suitability of recommended partnership interest Answer Explanation: FINRA rules require that representatives maintain in the files of the customer the documents that support the determination of suitability of the partnership interest for the customer. Textbook Reference: Please see textbook section 7.1.2

The files of a customer who received a recommendation to purchase an interest in a public oil and gas program must include A) A signed attestation that the customer has reviewed the risks of the partnership with a purchaser representative B) A signed statement that the customer does not hold the general partner responsible for potential financial loss related to the partnership business C) Written approval from the principal approving the recommendation before it was delivered to the customer D) The documents collected to support the determination of suitability of recommended partnership interest

B) Pink OTC Markets Answer Explanation: Companies that are quoted in the Pink OTC Markets are not required to file financial reports with the SEC or other regulators. Current financial reports must be filed for inclusion in the OTCBB, and listing on Nasdaq or the NYSE. Textbook Reference: Please see textbook section 9.3.4.2

The filing of current quarterly and annual financial reports is a requirement for inclusion in all of the following EXCEPT A) NYSE B) Pink OTC Markets C) Nasdaq D) OTCBB

D) All of the above cases and for all types of securities Answer Explanation: The fraud provisions of the act of 1934 apply to all persons and for all types of securities. No person or transaction is ever exempt from the antifraud provisions of the Securities Act of 1934. Textbook Reference: See textbook section 9.1

The fraud provisions of the Securities Exchange Act of 1934 apply to which of the following? A) Manipulation of the price of a municipal security B) Participation in an all-or-none offering and reporting the offering as firm to the client C) Short sale of municipal security serial bonds D) All of the above cases and for all types of securities

A) Consolidation of corporate assets. Answer Explanation: The primary goal of Mergers & Acquisitions (M & A) activity is to consolidate companies or the assets of companies. Textbook Reference: Please see textbook section 8.2.6

The goal of Mergers and Acquisitions (M & A) activity is the A) Consolidation of corporate assets. B) Prevention of market manipulation. C) Secondary market trading of common stock. D) Creation of a syndicate to underwrite an IPO.

B) A target firm is turned around and successfully sold through an IPO Answer Explanation: Private equity investments are profitable when the underperforming companies in which they take a majority stake are turned around and sold at a profit in an IPO. Textbook Reference: Please see textbook section 5.4.2

The greatest profit potential from a private equity investment occurs when A) The fund sells real estate it owns at a high profit B) A target firm is turned around and successfully sold through an IPO C) All available units in the fund are sold at a discount to their net asset value D) Units in the fund increase in value because of strong market performance

D) Broker call rate Answer Explanation: This rate of interest is the broker call rate. It is determined independently by commercial banks. Textbook Reference: Please see textbook section 10.3.3.5

The interest paid by investors in a margin account is based upon the A) Federal funds rate B) Prime rate C) LIBOR rate D) Broker call rate

C) Does not generally take place after the IPO Answer Explanation: Closed-end companies raise a fixed amount of capital in their IPO. This capital establishes the number of shares that then trade in the secondary market. Textbook Reference: Please see textbook section 4.3.2.1

The issuance of new shares by a closed-end fund A) Is continuous B) Occurs regularly on a scheduled basis C) Does not generally take place after the IPO D) Is determined by supply and demand

A) gross domestic product Answer Explanation: Gross domestic product (GDP) is defined as the total market value of goods and services produced within a country, regardless of the nationality of those who produce them. It is the most important measure of total US economic activity. Textbook Reference: Please see textbook section 10.1.2

The primary metric used for measuring total US economic growth from quarter to quarter and year to year is A) gross domestic product. B) the balance of trade. C) the consumer confidence index. D) national output

B) Their interest income is exempt from federal income taxes Answer Explanation: Investors are generally attracted to municipal bonds because of the fact that the interest income that they pay is usually not subject to federal income tax liability. This is a particularly important consideration for individuals who are in higher income tax brackets. Municipal bonds are not guaranteed by the federal government. Their interest rates are typically lower than those of corporate bonds. Textbook Reference: Please see textbook section 7.3.3

The main attraction of municipal bonds for many investors is that A) They pay interest at rates usually above those of corporate bonds B) Their interest income is exempt from federal income taxes C) They are guaranteed by the federal government D) They are not required to register with the SEC

D) Federal funds rate Answer Explanation: The federal funds rate is the most volatile interest rate, which changes on a daily basis Textbook Reference: Please see textbook section 10.3.3.3

The most volatile interest rate is the A) Prime lending rate B) London Interbank Offered rate (LIBOR) C) Discount rate D) Federal funds rate

A) forward stock split Answer Explanation: In a forward stock split (3:2 for example), the number of shares owned by the investor will increase while the price per share will decrease proportionately. Textbook Reference: Please see textbook section 1.7.4

The number of shares an investor owns will increase and the price per share will decrease in the event of a (n) A) forward stock split B) reverse stock split C) rights offering D) accepted tender offer

C) The municipal securities broker dealer that offered the security for sale Answer Explanation: The responsibility for delivery of an official statement belongs to the municipal securities firm that transacts business with the customer. Textbook Reference: Please see textbook section 8.4.3

The official statement must be delivered to customers by A) The financial advisor responsible for its creation B) The bond counsel C) The municipal securities broker dealer that offered the security for sale D) The issuer of the securities

Answer Explanation: A market index is a method of measuring the performance of a particular sector or basket of stocks. Classified in many different ways, indices vary from broad based measurement across many industries to narrow and more specialized on particular products or services. Textbook Reference: Please see textbook section 4.2.4.6

The performance of a specific basket of stocks is tracked by a(n) A) index B) stochastic model C) composite D) benchmark

D) business risk Answer Explanation: The risk that a particular company may not be profitable is usually characterized as business risk. Textbook Reference: Please see textbook section 1.3.2

The possibility always exists that a particular company may not be profitable. This is best characterized as A) credit risk. B) sector risk. C) inflation risk. D) business risk

A) will be identical for all investors, regardless of the number of shares being tendered. Answer Explanation: In a tender offer, all investors receive the same exact price. This is known as "all holders best price". Textbook Reference: Please see textbook section 8.2.6.1

The price received by investors in a tender offer will A) will be identical for all investors, regardless of the number of shares being tendered. B) be determined by the board of directors at the next meeting. C) be decided at the time of publication of the next audited financial statements. D) vary based on the exact number of shares the investor is tendering

B) Credit risk Answer Explanation: Credit risk is the risk that the issuer of debt will be unable to continue to pay interest on the money it has borrowed. The higher the credit risk, the greater the interest that must be paid by the issuer. Textbook Reference: Please see textbook section 7.2.4

The primary risk that determines the amount of interest an investor requires for a specific issuer is referred to as A) Marketability risk B) Credit risk C) Call risk D) Inflationary risk

D) due diligence Answer Explanation: Due diligence is the process used to investigate a potential deal for the protection of the parties to the contract. Textbook Reference: Please see textbook section 8.1.4

The process that is used by issuers and underwriters to investigate and review a potential offering and ensure the accuracy of available information is A) legal examination B) preliminary study C) objective determination D) due diligence

C) bakeoff Answer Explanation: During a bakeoff, the issuer accepts proposals from numerous investment banks. These proposals present the qualifications of underwriters as well as pricing and term sheets for the offering. Textbook Reference: Please see textbook section 8.3.2

The process through which an issuer chooses a team of underwriters to lead an offering is known as a(n) A) agreement B) clambake C) bakeoff D) auction

B) Underwriters make a bona fide public offering of all new issues Answer Explanation: The purpose of FINRA Rule 5130 is to ensure that underwriters make a bona fide public offering of all new issues by prohibiting them from selling new issues to the accounts of restricted persons. Textbook Reference: See textbook section 8.3.6

The purpose of FINRA's rule 5130 on restrictions of the purchase and sale of Initial Equity Public Offerings (IPOs) is to ensure that A) All new issues are allocated to employees of FINRA member firms B) Underwriters make a bona fide public offering of all new issues C) Only accredited investors participate in IPO's D) The issuer of an IPO properly registers the securities with the SEC

A) increase gross domestic product (GDP) during a recession Answer Explanation: During a recession, governments often takes steps to increase GDP, such as cutting taxes or introducing new spending programs. These are called economic stabilizers. Textbook Reference: Please see textbook section 10.1.2

The purpose of a government action called an economic stabilizer is to A) increase gross domestic product (GDP) during a recession. B) avoid high rates of inflation. C) keep stock prices high during a market downturn. D) support housing prices.

A) T+2 Answer Explanation: The regular-way trade cycle for most trades settles on the second day after trade execution - T+2. Textbook Reference: Please see textbook section 1.7

The regular-way trade cycle for most trades is A) T+2 B) T+1 C) T+5 D) T+3

C) systematic risk. Answer Explanation: Systematic risk, also referred to as market risk, is the fact that performance of individual securities will reflect the direction of the market. Textbook Reference: Please see textbook section 1.3.1

The risk that most stocks will fall on a day when the largest stock market indices are down is called A) counterparty risk. B) liquidity risk. C) systematic risk. D) credit risk.

C) Purchasing power risk Answer Explanation: Purchasing power, or inflation risk, is the risk that the returns of an investment will be adversely impacted by inflation. Textbook Reference: Please see textbook section 2.3.4

The risk that the returns of an investment will be negatively impacted by inflation is commonly known as A) Credit risk B) Call risk C) Purchasing power risk D) Interest rate risk

A) registration of new issues of municipal securities. Answer Explanation: MSRB rules do not apply to registration of new issues. Municipal issues are exempt from registration requirements under the Securities Act of 1933. The rules of the MSRB cover standards of professional qualification, compliance examinations, confirmations, clearance, settlement and many other aspects of doing business in municipal securities. Textbook Reference: Please see textbook section 8.2

The rulemaking authority of the MSRB extends to all of the following EXCEPT A) registration of new issues of municipal securities. B) the scope and frequency of compliance examinations. C) standards of professional qualifications. D) confirmation, clearance and settlement of transactions.

D) Outstanding stock Answer Explanation: Outstanding stock are shares that have been sold to the public and are currently owned by public investors. Treasury stock was previously outstanding, but was repurchased by the corporation to be retired or reissued. Textbook Reference: Please see textbook section 1.1

The shares of a corporation's stock that are held by the public are known as A) Authorized stock B) Treasury stock C) Issued stock D) Outstanding stock

C) make credit more or less available Answer Explanation: The Fed buys and sells securities in the marketplace to increase or decrease the money supply, making credit more or less available. When the Fed buys securities it is putting money into circulation, increasing the money supply and making credit more available. When the Fed sells securities it is taking money out of circulation, decreasing the money supply and making credit less available. Long term, these actions may check inflation or stop a recession. Textbook Reference: See textbook section 10.3.3.2

The short-term effect of the Federal Reserve's Open Market Committee is to A) check inflation B) stop a recession C) make credit more or less available D) do all of the above

C) $100,000 Answer Explanation: The standard BA denomination is $100,000. Smaller amounts are called odd-lots Textbook Reference: Please see textbook section 3.6.3

The standard denomination in which banker's acceptances are sold is A) $5,000 B) $1 million C) $100,000 D) $10,000

D) II and IV Answer Explanation: A bond issued under a state's constitutional authority is a general obligation bond. Bonds issued at the state level do not generally require a voter referendum for approval, but may be subject to the approval of the state legislature. Textbook Reference: Please see textbook section 3.4.1.1

The state of Illinois issues a bond authorized by its state constitution. This bond I. is a revenue bond II. Is general obligation bond III. always requires voter approval IV. does not generally require voter approval A) I and III B) II and III C) I and IV D) II and IV

B) Growth stock Answer Explanation: Growth stocks are stocks of companies that reinvest most of their earnings into their business. Because of their high potential for growth, they generally do not pay dividends. Textbook Reference: Please see textbook section 1.2.1.5

The stock of an issuer that reinvests most of its earnings back into the business is most likely classified as a(n) A) Cyclical stock B) Growth stock C) Small cap stock D) Income stock

D) A board of directors Answer Explanation: A unit investment trust differs from other investment companies in that it has no board of directors, corporate officers or investment advisor. Textbook Reference: Please see textbook section 4.4.1

The structure of a unit investment trust includes all of the following functions EXCEPT A) A sponsor B) A custodian C) A trustee D) A board of directors

B) $5 per share Answer Explanation: According to the SEC, the term penny stock generally refers to a security that trades OTC at a price of less than $5 per share. Textbook Reference: Please see textbook section 1.2.2

The term penny stock generally refers to a security issued that trades OTC at a price of less than A) $10 per share B) $5 per share C) $2 per share D) $1 per share

A) Monetarist economic theory. Answer Explanation: Monetarist economic theory espouses the use of the money supply to influence the economy. Textbook Reference: Please see textbook section 10.3.1.3

The theory that says the economy should be influenced through changes to the money supply is A) Monetarist economic theory. B) Stabilization. C) Classical economic theory. D) Keynesian economic theory.

B) Federal Open Market Committee Answer Explanation: The Federal Open Market Committee operates monetary policy for the Federal Reserve Board. Textbook Reference: Please see textbook section 10.3.3.2

The top monetary policy making body of the Federal Reserve is the A) Office of the Comptroller of the Currency B) Federal Open Market Committee C) Federal Reserve Bank of New York D) U.S. Treasury Department

C) Hybrid REIT Answer Explanation: A hybrid REIT combines the strategy of equity REITs and mortgage REITs. It invests in actual properties and also holds and purchases mortgages. Textbook Reference: Please see textbook section 5.1.4

The type of REIT the invests in both properties and real estate mortgages is a A) Blend REIT B) Balanced REIT C) Hybrid REIT D) Structured REIT

B) 1-2% of the assets under management Answer Explanation: Hedge fund managers generally charge a management fee of 1-2% of the assets under management plus 20% of the fund's profits. Textbook Reference: Please see textbook section 5.3

The typical asset management fee charged by a hedge fund manager is A) 20% of the assets under management B) 1-2% of the assets under management C) 10% of the assets under management D) 5% of the assets under management

C) market value of the underlying stock Answer Explanation: The value of the conversion privilege of a convertible bond is based on the value of the underlying common stock, as the investor can exchange the bond for the shares. The parity price is where investors are indifferent to owing the bond versus the common shares. Textbook Reference: Please see textbook section 3.1.3

The value of the conversion privilege of a convertible bond is based on the A) parity price of the underlying stock B) par value of the bond C) market value of the underlying stock D) conversion ratio of the bond

B) track indexes. Answer Explanation: The vast majority of ETF assets are passively managed equity (stock) funds that track an index, such as the S&P 500. The index-tracking quality of ETFs helps to keep their management fees relatively low, compared to most mutual funds. Textbook Reference: Please see textbook section 4.5.1

The vast majority of ETF assets are in equity (stock) funds that seek to A) diversify internationally. B) track indexes. C) concentrate on small sectors and niches of the market. D) outperform the market

A) The first call date Answer Explanation: The yield to call is calculated using the first call date. Textbook Reference: Please see textbook section 2.2.4

The yield to call on a bond is calculated using A) The first call date B) Any call date C) The last call date D) The maturity date

D) at least $200,000 in each of the two most recent years Answer Explanation: The Regulation D income test is based on sustainable income over the two most recent years, with an expectation of maintaining similar income in the future. The threshold is $200,000 for a single person or $300,000 for a married couple. Textbook Reference: Please see textbook section 8.2.3

To qualify as an "accredited investor" under the SEC's Regulation D, a single person would need to have income of A) at least $250,000 in the most recent year B) at least $150,000 in the most recent year C) at least $100,000 in each of the two most recent years D) at least $200,000 in each of the two most recent years

A) authorized stock that was previously outstanding but has been repurchased by the issuer. Answer Explanation: Treasury stock are shares that were previously sold to the public but have since been repurchased by the issuer. These shares do not carry voting rights nor pay dividends. Textbook Reference: Please see textbook section 1.1

Treasury stock is best characterized as A) authorized stock that was previously outstanding but has been repurchased by the issuer. B) issued and outstanding shares that are now being held by members of the board of directors. C) bonds that were sold by the US Government that the Treasury department has since repurchased. D) authorized stock held by an executive officer of the firm that carries voting rights but no longer pays a dividend.

A) Eurodollar deposits Answer Explanation: U.S Dollars held in a depository outside the U.S. are commonly known as Eurodollar deposits. Textbook Reference: Please see textbook section 3.1.4

U.S Dollars held in bank accounts abroad are known as A) Eurodollar deposits B) foreign deposits C) American deposits D) American Depository Receipts (ADR)

C) II and III Answer Explanation: U.S. government securities are backed by the full faith and credit of the U.S. government. Because of their low default risk they pay less interest than corporate issues. Interest on U.S. government securities is taxed at the federal level, but exempt at the state and local levels. Textbook Reference: Please see textbook section 3.5

U.S. Government securities offer investors I. interest that is exempt from taxation at the federal level II. interest that is exempt from taxation at the state level III. backing by the full faith and credit of the U.S. government IV. interest that is slightly higher than that paid by AAA-rated corporate securities A) I and IV B) II and IV C) II and III D) I and III

A) Pass through without taxation Answer Explanation: Like other investment companies, hedge funds are set up as flow-through tax structures and are not taxed on the income they distribute. Textbook Reference: Please see textbook section 5.3

U.S. based hedge funds are subject to which of the following tax consequences on income that is distributed? A) Pass through without taxation B) Taxation at favorable capital gains rate C) Tax exemptions at the state level D) Double taxation Answer Explanation: Like other investment companies, hedge funds are set up as flow-through tax structures and are not taxed on the income they distribute. Textbook Reference: Please see textbook section 5.3

D) and the underwriter agree on the terms and fees of the offering Answer Explanation: In a negotiated sale, the issuing municipality and the chosen underwriter negotiate the terms of the offering in lieu of having several underwriters compete for the business. Textbook Reference: Please see textbook section 8.3.2

Under a negotiated sale, the issuer A) holds a competitive process to obtain the best possible terms B) send RFPs to prospective underwriters C) and the underwriter agree to a stand-by commitment D) and the underwriter agree on the terms and fees of the offering

D) exempt from SEC registration. Answer Explanation: Unregistered securities can not be sold in interstate commerce unless they qualify for one of several exemptions from registration. In general, it doesn't matter who buys, sells or trades unregistered securities. It only matters whether or not they have qualified for an exemption. Textbook Reference: Please see textbook section 8.2

Under the '33 Act, it is a felony to offer or sell unregistered securities through interstate commerce, unless the securities are A) limited purpose bonds. B) transferred between securities dealers. C) primary issues of common stock. D) exempt from SEC registration.

A) accredited investors, with a limited number of non-accredited investors Answer Explanation: Regulation D defines "accredited investors" as institutions, directors, partners and officers of the issuer plus other individuals who meet tests for net worth or income. Regulation D private placements can be offered to an unlimited number of accredited investors and a maximum of 35 nonaccredited investors. Textbook Reference: Please see textbook section 8.2.3.1

Under the SEC's Regulation D, a private placement may be offered to A) accredited investors, with a limited number of non-accredited investors B) a maximum of 40 investors C) institutional investors D) registered investors

B) A staff accountant who has worked for the company for more than 10 years. Answer Explanation: The Securities Exchange Act of 1934 defines insiders as officers, directors and owners of more than 10% of the outstanding stock of a corporation Textbook Reference: Please see textbook section 8.1.1

Under the Securities Exchange Act of 1934 all of the following persons are defined as insiders EXCEPT A) A non-affiliated director of the firm B) A staff accountant who has worked for the company for more than 10 years. C) An owner of more than 10% of the outstanding stock of a corporation D) An officer of the firm that does not own stock in the company

B) High rate of unemployment Answer Explanation: The Fed is likely to ease the money supply if the economy is slow or stagnant, as long as inflation is not high. When unemployment is high, the economy is usually in a recession or a trough, and, stimulating the economy through the easing of credit would be typical. An increase in housing starts and GDP are signs of a strengthening economy so an easy money policy is not needed. The Fed usually tightens the money supply to combat high inflation. Textbook Reference: Please see textbook section 10.3.3

Under which of the following circumstances would the Federal Reserve be likely to take measures to ease the money supply? A) Housing starts have increased B) High rate of unemployment C) GDP is rising D) Inflation is high

B) 15 minutes of execution. Answer Explanation: Trades must be reported to the RTRS within 15 minutes of execution. Textbook Reference: Please see textbook section 9.5.3

Unless eligible for an exception, municipal trades must be reported to the Real-time Transaction Reporting System (RTRS) within A) 24 hours of execution. B) 15 minutes of execution. C) 10 minutes of execution. D) 30 minutes of execution.

B) Central bank purchasing government debt Answer Explanation: If the central bank wishes to lower interest rates, it purchases government debt, thereby increasing the amount of cash in circulation or crediting banks' reserve accounts. Taxation is a tool of fiscal policy. Textbook Reference: Please see textbook section 10.3.3.2

Using the tools of monetary policy, which of the following actions would result in lower interest rates? A) Central bank selling government debt B) Central bank purchasing government debt C) U.S. government increasing tax revenues D) U.S. government decreasing tax revenues

A) 30 to 180 days Answer Explanation: Maturities of BAs typically fall between 30 and 180 days. Issues usually can be sold in the secondary market at any time prior to maturity. Textbook Reference: Please see textbook section 3.6.3

What are typical maturities in banker's acceptances (BAs)? A) 30 to 180 days B) They don't have fixed maturities C) 180 to 365 days D) 1-2 years

C) A competition between investment bankers to participate in an offering, or to become lead underwriter Answer Explanation: At a bake-off, investment banks pitch the issuer to demonstrate their desire to participate as well as their underwriting capabilities. The winner of the bake-off is named lead underwriter, head of the syndicate. Textbook Reference: Please see textbook section 8.3.2

What is a bake-off? A) Countdown of the final hours to the effective date and live offering B) The allocation of IPO shares in an over-subscribed offering C) A competition between investment bankers to participate in an offering, or to become lead underwriter D) Road shows that include high-tech presentations or celebrities to drum up interest

D) A contractual arrangement between two parties, in which one party agrees to sell securities to another party at a specified price with a commitment to buy the securities back at a later date for another specified price. Answer Explanation: A repo is a contractual arrangement between two parties, in which one party (a borrower of cash) agrees to sell securities to another party (lender of cash) at a specified price with a commitment to buy the securities back at a later date for another specified (typically higher) price. This higher price reflects the interest earned by the purchaser (lender). Textbook Reference: Please see textbook section 3.6.4

What is a repurchase agreement or repo? A) A contractual arrangement between a customer and a broker-dealer, in which the broker-dealer gives a selling customer the right to repurchase sold securities up until the settlement date. B) A contractual arrangement between two parties, in which the brokerdealer can repossess securities pledged as collateral in connection with margin loans. C) A contractual arrangement between a customer and a broker-dealer, in which the broker-dealer gives a selling customer the right to repurchase sold securities for 30 days. D) A contractual arrangement between two parties, in which one party agrees to sell securities to another party at a specified price with a commitment to buy the securities back at a later date for another specified price.

A) An amount not to exceed the greater of 1% of the outstanding shares of the same class of stock being sold, or the average reported weekly trading volume during the four weeks preceding the sale. Answer Explanation: When control persons file a proposed notice of sale with the SEC, they are entitled to sell an amount not to exceed the greater of 1% of the outstanding shares of the same class of stock, or the average reported weekly trading volume during the four weeks preceding the sale. This amount is the maximum that can be sold within the three month period following the notice of sale. Textbook Reference: Please see textbook section 8.2.4.2

What is the amount of securities that control persons can sell within 90 days after filing a Notice of Proposed Sale with the SEC? A) An amount not to exceed the greater of 1% of the outstanding shares of the same class of stock being sold, or the average reported weekly trading volume during the four weeks preceding the sale. B) A maximum of 10% of their holdings within each 90 day period C) The greater of 50,000 shares or $50,000 worth of the stock D) There is no limit as long as the sale takes place within 90 days.

B) Bake-off, registration statement filed, road show, effective date Answer Explanation: The timeline begins with pre-registration period events such as a bake-off to choose the lead underwriter. It ends with the effective date, which is when the SEC clears the securities for public sale. Textbook Reference: Please see textbook section 8.1.4

What is the correct sequence of events, from first to last, in the registration timeline? A) Road show, registration statement filed, bake-off, effective date B) Bake-off, registration statement filed, road show, effective date C) Road show, bake-off, effective date, registration statement filed D) Registration statement filed, effective date, road show, bake-off

D) Triple-A Answer Explanation: The highest bond rating is Triple-A. Only a few premier governments, companies and municipalities qualify for it. Moody's writes the rating "Aaa" and Standard & Poor's uses "AAA." Textbook Reference: Please see textbook section 2.3.5.1

What is the highest rating that a bond can earn? A) Outstanding B) Excellent C) A+ D) Triple-A

B) The bank guarantor fails Answer Explanation: Although the underlying deposits that serve as the borrower's collateral in BAs may be FDIC-insured, BAs themselves are not covered by FDIC insurance. They are not bank deposits and the main credit risk is that the bank guarantor fails. Textbook Reference: Please see textbook section 3.6.3

What is the main credit risk in a BA? A) There is none because BAs are FDIC-insured B) The bank guarantor fails C) The issuer declares bankruptcy D) Rapidly rising interest rates

C) The time at which the bond terminates are different. Answer Explanation: Yield to maturity reflects the yield earned if the investor holds the bond until maturity, while yield to call reflects the yield earned assuming the issuer calls the bond back prior to maturity. Textbook Reference: Please see textbook section 2.2.4

What is the main difference between yield to maturity (YTM) and yield to call (YTC)? A) Premiums and discounts are ignored in YTC but not in YTM. B) Premiums and discounts are ignored in YTM but not in YTC. C) The time at which the bond terminates are different. D) The current market price is relevant when calculating YTM but not YTC.

D) One share Answer Explanation: Investors are usually able to place orders to buy or sell as few as one share of an ETF. Broker-dealers may impose dollar or share minimums on ETF purchases but most do not. Textbook Reference: Please see textbook section 4.5.1.2

What is the minimum amount an investor can normally invest in an ETF? A) 100 shares B) 10000 C) 5000 D) One share

C) 9% Answer Explanation: Nominal yield, AKA the coupon, is calculated as the sum of annual coupon (interest) payments divided by the face amount of the bond. Two coupons of $45 each = $90; $90 divided by $1,000 face value = 9%. The current yield is calculated using the market price of the bond. The current yield for this bond is 10% ($90/$900). Textbook Reference: Please see textbook section 2.2.1

What is the nominal yield on a bond that is trading for $900, with a face value of $1,000, and pays two coupons per year of $45 each? A) 4.5% B) 10% C) 9% D) 6%

C) 9% Answer Explanation: Nominal yield, AKA the coupon, is calculated as the sum of annual coupon (interest) payments divided by the face amount of the bond. Two coupons of $45 each = $90; $90 divided by $1,000 face value = 9%. The current yield is calculated using the market price of the bond. The current yield for this bond is 10% ($90/$900). Textbook Reference: Please see textbook section 2.2.1

What is the nominal yield on a bond that is trading for $900, with a face value of $1,000, and pays two coupons per year of $45 each? A) 6% B) 10% C) 9% D) 4.5%

B) Less than one year Answer Explanation: The money market is the part of the global fixed-income market that issues and trades debt instruments with the shortest maturities typically less than one year. Textbook Reference: Please see textbook section 3.6

What is the typical maturity of instruments traded in money markets? A) From 1 to 3 years B) Less than one year C) Less than 3 months D) Up to five years

D) IV, II, I, III, Answer Explanation: The typical sequence during the order period is Presale Orders, then Group Orders, then, Designated Orders, and finally member orders. Textbook Reference: Please see textbook section 8.4.1.1

What is the typical sequence for the order period: I. Designated Orders II. Group Orders III. Member Orders IV. Presale Orders A) IV, III, II, I, B) I, II, III, IV, C) IV, I, III, II, D) IV, II, I, III,

A) The CD may be redeemed by the issuing bank only Answer Explanation: Most CDs offered to individuals are non-negotiable. This means they can't be re-sold and can only be redeemed by the issuing bank. Textbook Reference: Please see textbook section 3.6.2.1

What liquidity options are available in a non-negotiable certificate of deposit (CD)? A) The CD may be redeemed by the issuing bank only B) The CD may be resold in the secondary market C) There are none D) The CD may be redeemed by any bank

D) Shelf Answer Explanation: A shelf registration allow securities issuers to make multiple offerings of equity or debt securities over up to a three-year period, without having to file a new registration or prospectus. They are limited to well-known seasoned issuers (WKSIs). Textbook Reference: Please see textbook section 8.3.1

What name is given to a type of securities registration that allows the issuer to make multiple offerings of equity or debt securities under the same prospectus? A) Serial B) Retroactive C) Continuous D) Shelf

C) Trustee A trustee is responsible for administrative duties of a unit investment trust, which include the custodial, recordkeeping and tax and accounting responsibilities. Textbook Reference: Please see textbook section 4.4.1

What party is responsible for the administrative duties of a unit investment trust? A) Sponsor B) Custodian C) Trustee D) Bond Counsel

B) Regular and rigorous Answer Explanation: Members are required to regularly and rigorously review their procedures for meeting the best execution duty. If a firm chooses not to conduct an order-by-order review, regular means at least quarterly. Textbook Reference: Please see textbook section 9.5.1

What standard must members meet in reviewing their procedures for meeting the best execution obligation? A) As defined in FINRA's Green Book B) Regular and rigorous C) Prudent man D) Thorough and consistent

D) Interpositioning Answer Explanation: Interpositioning is a prohibited practice for both principal and agency trades. It is usually done to generate extra mark-ups, commissions, order flows or rebates. The only time where interpositioning is allowed is when the customer receives a more favorable price as a result. Textbook Reference: Please see textbook section 9.5.1.1

What term describes inserting a second broker-dealer between the member and the best market for a security, so a customer does not receive best execution? A) Interpolation B) Front running C) Stalking horse D) Interpositioning

C) Inflation Answer Explanation: One way to measure the value of currencies is against real goods such as real estate, commodities or precious metals. When real goods rise in value against currencies, the trend is called inflation. In the U.S. inflation is measured by the Consumer Price Index (CPI) Textbook Reference: Please see textbook section 10.1.3

What trend occurs when the value of real goods, such as a barrel of oil, rises against most of the world's currencies? A) Depreciation B) Deflation C) Inflation D) Devaluation

B) Financial debts and leases Answer Explanation: ABS is collateralized by financial assets, such as student loans, auto loans and equipment leases (but not the hard equipment itself). Textbook Reference: Please see textbook section 3.3.3

What type of asset provides the collateral for asset-backed securities (ABS)? A) Merchant inventories B) Financial debts and leases C) Real estate D) Corporate equipment, including vehicles

D) Buy limit orders Answer Explanation: Corporate event adjustments are made for orders below the current market prices, including buy limit, sell stop and sell stop limit orders. Textbook Reference: Please see textbook section 9.4.5

What type of open orders must be adjusted for corporate events that affect a security's price and/or number of shares? A) All buy and sell orders B) Stop orders only C) Sell limit orders D) Buy limit orders

D) Market Answer Explanation: A market order gives the broker instructions to buy or sell a specified quantity of securities immediately, as soon as the order reaches the market. A full execution of the order is assured but the execution price is unknown. Textbook Reference: Please see textbook section 9.4.2

What type of order should Martin enter if his objective is to buy 500 shares of Cisco stock as soon as possible at the best price available? A) Good-til-cancelled B) Limit C) Trailing stop D) Market

C) Is dissolved and no longer active Answer Explanation: A UIT is created for a specified period of time. Its termination date is established at the time the trust is created, and the trust is dissolved when that date is reached. Textbook Reference: Please see textbook section 4.4.1.2

When a UIT reaches the termination date specified at its creation, the trust A) Has a new offering of units B) Is sold and proceeds are distributed to unit holders C) Is dissolved and no longer active D) Can refile with the SEC for a subsequent primary offering

C) Until maturity Answer Explanation: The process of accretion (in discount bonds) and amortization (in premium bonds) continues until the bond is sold, or until the bond maturity. Textbook Reference: Please see textbook section 2.5

When a bond is bought at a premium to par value and held to maturity, the maximum number of years that it must be amortized, for tax cost basis purposes, is A) 5 years. B) 15 years. C) until maturity. D) 10 years.

C) Its nominal yield, current yield, and yield-to-maturity will all be equal Answer Explanation: When a bond is trading at par, its nominal yield, current yield, and yield-to maturity will all be equal. The nominal yield or coupon is the stated interest rate that the purchaser of a bond will be paid on the bond's par (face) value, expressed as a percentage. Hence, the nominal yield on a $1,000 par bond ($100 price) that pays a 7.5% coupon is simply 7.5%. A bond's current yield is its annual interest divided by the current price of the bond. Textbook Reference: Please see textbook section 2.2.5 Question

When a bond is trading at par, which of the following is TRUE? A) The nominal yield will be lower than the current yield and yield-tomaturity B) The current yield will be lower than the nominal yield, and the yieldto- maturity will be lower than the current yield C) Its nominal yield, current yield, and yield-to-maturity will all be equal D) The yield-to-maturity will be higher than the nominal yield, but lower than the current yield

A) Proprietary order for the firm's own account Answer Explanation: A "front-running" violation can occur when a firm holds pending customer orders for execution, taking advantage of price knowledge pertaining to those orders and then executing proprietary orders for its own account in the same securities, ahead of the customer's order. Textbook Reference: Please see textbook section 9.5.7

When a broker-dealer holds customer orders for execution and takes advantage of price knowledge pertaining to those orders, which of the following types of trades would suggest a prohibited activity? A) Proprietary order for the firm's own account B) Sell order for a retail client C) Buy order for an institutional client D) Riskless principal trade

C) buying or selling the normal trading unit of that stock at the quoted price Answer Explanation: When a broker-dealer maintains a firm market in a stock it is committed to trading the stock at the quoted price, and for up to the quoted number of round lots. Any amount greater than that must be negotiated with the broker-dealer. Quotes in the NASDAQ are firm quotes, whereas quotes on the pink sheets are workable indications, and are not binding. Textbook Reference: Please see textbook section 9.2.1

When a broker-dealer maintains a firm market in a stock, that brokerdealer is committed to A) working out the amount of the markup or commission on each OTC transaction B) buying back any security it sells C) buying or selling the normal trading unit of that stock at the quoted price D) maintaining a continuous subject market

C) the share price will increase, creating potential heightened interest in the company. Answer Explanation: As the result of a reverse stock split, the company share price will rise, thus possibly increasing the marketability of the stock, as investors will no longer perceive it as a low- priced stock. Textbook Reference: Please see textbook section 1.7.4

When a company engages in a reverse stock split, A) the result may be a delisting of the shares from the primary listing venue. B) the net worth of the company will be negatively impacted. C) the share price will increase, creating potential heightened interest in the company. D) the share price will decline, causing investors to potentially lose interest in the stock.

D) A change in the number of shares outstanding and share price, but no true valuation change to the investor Answer Explanation: A stock split represents an artificial adjustment of a company's stock price and shares outstanding. The goal is to either increase the share price (for a low-priced stock) or to reduce the share price (for a high-priced stock). Textbook Reference: Please see textbook section 1.7.4

When a company engages in a stock split, the result is A) A signal to the marketplace that the company is about to enter into merger negotiations with a strategic partner B) A depreciation in the overall value of an investor's holding in that company. C) A fundamental change in the market capitalization of the company D) A change in the number of shares outstanding and share price, but no true valuation change to the investor

A) raise capital quickly and avoid various regulatory requirements Answer Explanation: Private Investment in public equity (PIPE) occurs when a company sells some of its publicly traded shares to an institutional investor, typically at a discount. This is done to raise capital quickly with few regulatory restrictions. Textbook Reference: Please see textbook section 8.2.3

When a company undertakes a PIPE transaction, they are attempting to A) raise capital quickly and avoid various regulatory requirements. B) issue stock options to institutional investors for future capital expansion. C) restructure existing corporate debt to enhance their balance sheet. D) launch a convertible bond offering to expand investor holdings.

C) I and II only Answer Explanation: Position trading is another term for a firm making a market in securities and trading for its own account to make a profit. Textbook Reference: Please see textbook section 9.2.1.1

When a firm "position trades", it I. makes a market in securities II. trades for the firm's account III. sells short in all transactions IV. executes agency trades for customers A) II and III only B) I, II, III and IV C) I and II only D) I, II and IV only

C) failing to honor its published quotation Answer Explanation: Backing away is a violation of FINRA rules, whereby a market maker does not honor a firm quote that it has published. Textbook Reference: Please see textbook section 9.3.3.1

When a market maker engages in "backing away", it is A) withdrawing from an underwriting commitment. B) executing a customer order and the failing to properly the report the execution to FINRA. C) failing to honor its published quotation. D) extending an employment offer to an individual and then retracking the offer.

B) Is added to the price paid to the seller Answer Explanation: The calculation of accrued interest for municipal bonds is based on 360 day years and 30 day months. It is added to the price paid to the seller, and includes interest payable up to the settlement date only. Bonds that trade flat do not include accrued interest. Textbook Reference: Please see textbook section 2.4

When a municipal bond is sold, the amount of accrued interest A) Is only included in the price if the bond is trading flat B) Is added to the price paid to the seller C) Is calculated based on actual day months D) Includes the settlement date when calculated

A) II and IV Answer Explanation: Secondary trading of municipal securities takes place in the over the counter market. This market is a decentralized dealer to dealer marketplace and includes only firms that are registered with the MSRB. Textbook Reference: Please see textbook section 3.4

When a municipal bond trades in the secondary market, any transactions take place I. On an exchange II. Over the counter III. Through an auction IV. Dealer to Dealer A) II and IV B) I and III C) I and IV D) II and III

D) Market Answer Explanation: A stop order becomes a market order when a transaction occurs at or above the stop price for a buy, or at or below the stop price for a sell. Textbook Reference: Please see textbook section 9.4.4

When a stop price is hit, a stop order turns into what type of order? A) Limit B) Stop limit C) Fill or kill D) Market

A) CMO Answer Explanation: The term 'tranche' is associated with CMOs. Many CMOs are comprised of several different components, or tranches, each with unique investment characteristics and objectives. Textbook Reference: Please see textbook section 3.3.2

When an investor purchases a 'tranche', he is purchasing a unit of a(n) A) CMO B) open-end investment company C) pool of heavily traded equity securities D) STRIP

D) Name of the trustee that holds title to the collateral Answer Explanation: When analyzing a mortgage bond, the trustee holding title to the collateral has no effect on the investment quality of the bond. The rating, the underlying collateral and the current economic cycle will all yield conclusions about the credit and prepayment risk about the bond in question. Textbook Reference: Please see textbook section 3.3.1

When analyzing the investment quality of a mortgage bond, which of the following would be LEAST useful? A) Rating assigned the obligation by a nationally recognized rating service B) General trends in the economic cycle C) Information pertaining to the collateral that backs the obligation D) Name of the trustee that holds title to the collateral

A) Interest earned is added to any capital gain, and this result is then divided by the initial purchase price Answer Explanation: Total return on a bond is determined by adding the interest earned during the time period to any capital gain, then dividing this result by the initial purchase price of the bond. Textbook Reference: Please see textbook section 7.6.1.3

When calculating total return on a bond, A) Interest earned is added to any capital gain, and this result is then divided by the initial purchase price B) Interest earned is subtracted from any capital gain, and this result is then divided by the initial purchase price C) Interest earned is subtracted from the redemption value of the bond .D) Interest earned is divided by the redemption value of the bond

D) II and III Answer Explanation: Most investors are concerned with safety of principal, so bonds with lower credit ratings are less marketable than highly rated bonds. Bonds with low credit ratings must offer a higher yield to offset their reduced degree of safety. Textbook Reference: Please see textbook section 2.3.5.1

When compared to a bond with a high credit rating, a bond with a low credit rating usually I. is more marketable II. is less marketable III. offers a higher yield IV. offers a lower yield A) I and III B) II and IV C) I and IV D) II and III

B) Class B and C shares carry higher 12b-1 fees than Class A shares. Answer Explanation: Class B & C shares tend to have higher 12b-1 fees than Class A shares. Textbook Reference: Please see textbook section 4.2.5.3

When comparing 12b-1 fees across the different share classes of mutual funds, it would be found that A) Class A & B shares have higher 12b-1 fees than Class C shares. B) Class B and C shares carry higher 12b-1 fees than Class A shares. C) Class A shares have higher 12b-1 fees than Class B & C shares. D) all share classes have the same 12b-1 fee structure. Answer Explanation: Class B & C shares tend to have higher 12b-1 fees than Class A shares. Textbook Reference: Please see textbook section 4.2.5.3

B) Long-term bonds generally provide greater liquidity than short-term bonds Answer Explanation: When comparing long-term bonds and short-term bonds, long-term bonds generally have less liquidity than short-term bonds. Short-term bonds have less price change than long-term bonds when interest rates are changing. Long-term bonds are subject to greater market risk, interestrate risk, and purchasing-power risk than short term bond. Textbook Reference: Please see textbook section 2.3.1

When comparing long-term bonds and short-term bonds, all of the following statements are true EXCEPT A) Long term bonds have more purchasing power risk than short-term bonds B) Long-term bonds generally provide greater liquidity than short-term bonds C) Long-term bonds generally have higher yields than short term bonds D) When interest rates change, fluctuations in the dollar price of longterm bonds are usually greater than short-term bonds

B) II and III Answer Explanation: Rights are short term instruments that allow the holder to buy the stock at a price that is typically lower than the current market price of the stock. Warrants are long-term instruments. The exercise price of the stock is typically higher than the market price of the stock at the time the warrants are issued. Warrants have value only if the price of the stock appreciates. Textbook Reference: Please see textbook section 1.1.1.8

When comparing rights and warrants, which of the following statements are TRUE? I. Rights are longer term than warrants II. Warrants are longer term than rights III. At issue, the exercise price of a right is lower than the market price of the underlying stock IV. At issue, the exercise price of a warrant is lower than the market price of the underlying stock A) I and IV B) II and III C) II and IV D) I and III

B) Rely on its professional judgment and market expertise to determine a fair quote from recent market activity Answer Explanation: Dealers are expected to establish market value as accurately as possible, but may rely on professional judgment and market expertise when establishing a price for a security for which there is a limited market. Textbook Reference: Please see textbook section 9.2.1.4

When determining a fair and reasonable price for a relatively illiquid security, a dealer must A) Acquire at least 3 quotes from competing dealers B) Rely on its professional judgment and market expertise to determine a fair quote from recent market activity C) Refuse to provide a quote if recent information is unavailable D) Offer subject quotes only

A) There is no requirement Answer Explanation: Tombstone ads are an important way investment bankers communicate terms of a public offering to the financial community and institutional investors, prior to the offering's effective date. However, they are not required and are not approved by the SEC. They are always at the option of the issuer or underwriter. Textbook Reference: Please see textbook section 8.1.2

When does the SEC require the lead underwriter of a public offering to publish a tombstone ad? A) There is no requirement B) 20 days before the effective date C) At the start of the cooling-off period D) At any time before the effective date

D) The liquidity of the partnership interest may be very limited Answer Explanation: Limited partnership interests are not highly liquid. It is difficult to cash in the interest until the dissolution of the partnership. Textbook Reference: Please see textbook section 5.2

When explaining the features of a limited partnership interest to a prospective customer, a registered representative must explain that A) The tax benefits of the partnership are the primary reason to invest B) The value of that partnership interest will vary daily based on market valuation determined by exchange trading C) Limited partners will have the opportunity to vote regularly on management strategy for the partnership D) The liquidity of the partnership interest may be very limited

A) A client order will likely not receive the best possible execution Answer Explanation: Interpositioning involves the placement of a third party between a brokerdealer and the best available market price, usually resulting in the customer receiving an inferior execution price. Textbook Reference: Please see textbook section 9.5.1.1

When inter-positioning is employed, A) A client order will likely not receive the best possible execution B) Clients typically receive a better execution than under other circumstances C) Client orders will be filled before market maker orders D) Two market makers will execute trades amongst themselves

C) Will fluctuate less than the price of a long-term bond. Answer Explanation: When interest rates change, the price of a long-term bond will fluctuate more than the price of a short- term bond. Textbook Reference: Please see textbook section 2.3.1

When interest rates change, the expectation is that the price of a short-term bond A) Will fluctuate in the opposite direction from that of a long-term bond. B) Will fluctuate more than the price of a long-term bond. C) Will fluctuate less than the price of a long-term bond. D) Will only fluctuate if there is significant demand for the bond.

A) Increasing likelihood that an issuer will call in its outstanding bonds Answer Explanation: When market interest rates decline, there will be an increased probability that an issuer will call in its outstanding bonds, especially if those bonds carry higher interest rates. Textbook Reference: Please see textbook section 2.1.9

When interest rates fall in the marketplace, there is a(n) A) Increasing likelihood that an issuer will call in its outstanding bonds B) Decreasing fear of credit downgrades C) Expectation that inflation will become more prominent D) Reduced incentive for borrowers in general to refinance their loans, such as mortgages

C) Index funds Answer Explanation: Index funds are appropriate for investors seeking to minimize fees. The other choices will generate more significant fees due to their active management. Textbook Reference: Please see textbook section 4.2.4.6

When one of an investor's goals when purchasing mutual funds is to minimize fees, consideration should be given to A) Hedge funds B) Actively managed funds C) Index funds D) Target date funds

D) II and III Answer Explanation: A weakening or devaluation of the dollar compared to foreign currency makes U.S. exports more competitive with foreign exports. Likewise, a strengthening in foreign currencies compared to the U.S. dollar would also cause U.S. products to become more competitive. Textbook Reference: Please see textbook section 10.4.3

Which TWO of the following cause U.S. exports to become more competitive? I. Strengthening of the U.S. dollar against foreign currency II. Weakening of the U.S. dollar against foreign currency III. Strengthening of foreign currency against the U.S. dollar IV. Weakening of foreign currency against the U.S. dollar A) I and III B) I and IV C) II and IV D) II and III

A) II and IV Answer Explanation: All orders placed below the market are adjusted downward on the exdividend date by the amount of the dividend. Orders placed below the market are buy limits, sell stops, and sell stop limits. Sell limits, buy stops and buy stop limits are not adjusted on the ex-dividend date. Textbook Reference: Please see textbook section 9.4.5

Which TWO of the following orders would NOT be reduced on the exdividend date? I. Buy limit order II. Buy stop order III. Open sell stop order IV. Sell limit order A) II and IV B) I and III C) I and IV D) II and III

C) Machines Answer Explanation: The fourth market consists of electronic communications networks (ECNs), passive computer systems that act as agents, automatically matching buy and sell orders. They can operate 24 hours per day, seven days per week. Effectively, machines serve as agents or market makers in this market. Textbook Reference: Please see textbook section 9.3.5.2

Which entity serves as the agent or market maker in the fourth market? A) DMMs B) Market makers C) Machines D) Specialists

A) Making a market in an illiquid stock Answer Explanation: It is not a violation of securities industry rules to make a market in an illiquid security. The other practices are prohibited. Textbook Reference: Please see textbook section 9.5

Which of the following activities does not violate securities industry rules? A) Making a market in an illiquid stock B) Front-running C) Accepting a payment for market making activities D) Trading ahead of a research report Answer Explanation: It is not a violation of securities industry rules to make a market in an illiquid security. The other practices are prohibited. Textbook Reference: Please see textbook section 9.5

D) Filing of the registration statement Answer Explanation: The cooling-off period begins once the issuer files the registration statement with the SEC. Indications of interest can be made by potential investors during the cooling-off period. Textbook Reference: Please see textbook section 8.1.4

Which of the following activities occurs prior to the cooling-off period? A) Securities begin trading B) The effective date C) Investors give non-binding indications of interest D) Filing of the registration statement

D) General partner Answer Explanation: General partners actively manage the business and have unlimited liability for its debts and obligations. Limited partners may not actively participate in management. Textbook Reference: Please see textbook section 5.2.1

Who actively manages the business of a limited partnership? A) Managing director B) Limited partner C) Board of directors D) General partner

C) Shelf registration Answer Explanation: Registration exemptions include private placements, Section 4(6), Section 4(2), Regulation A, Intrastate Offerings, and Rule 701. Shelf registrations allow qualified companies to make multiple offerings of securities under a single pre-filed registration. Textbook Reference: Please see textbook section 8.3.1

Which of the following allows an issuer to sell securities multiple times using the same registration statement? A) Section 4(2) B) Private placement C) Shelf registration D) Intrastate offering

D) I and IV Answer Explanation: Generally, if the credit rating of a bond is upgraded, the market will find the bond more valuable and its price will rise. Because of the inverse relationship between price and yield, the bond's yield (i.e. yield-to-maturity) would fall. Textbook Reference: Please see textbook section 2.3.5.1

Which of the following are likely to occur if a bond's credit rating is upgraded? I. Its price will increase II. Its price will decrease III. Its yield will increase IV. Its yield will decrease A) II and IV B) I and III C) II and III D) I and IV

A) I and II only Answer Explanation: For an intrastate exemption under Rule 147, the issuer's principal place of business must be in the state and 100% of the securities must be sold to state residents. Additionally, they must meet one of the following requirements: at least 80% of the asset must be located in the state, at least 80% of the revenues must be derived from the state, at least 80% of proceeds from the sale of securities must be used in the state, or a majority of the company's employees must work in the state. Textbook Reference: Please see textbook section 8.2.2

Which of the following are requirements of an issuer to pursue an exempt offering under Rule 147? I. The issuer is incorporated in the state II. 100% of the securities must be sold to state residents III. 100% of the issuer's assets must be located in the state IV. The issuer's board of directors must all be residents of the state A) I and II only B) I only C) I, II, III, and IV D) I, II, and III only

B) It will be largely unaffected by changes in economic activity Answer Explanation: A defensive stock will by definition be resistant to changes in economic cycles. Examples of these companies include consumer staples and utilities. Textbook Reference: Please see textbook section 1.2.1.4

Which of the following best characterizes a defensive stock? A) It tends to have seasonal fluctuations, as consumers adjust their spending focus B) It will be largely unaffected by changes in economic activity C) It is greatly impacted by changes in the economy D) It will tend to fluctuate whenever a period of economic uncertainty sets in

D) Accepts orders from its subscribers only, typically broker-dealers or institutional clients. Answer Explanation: Electronic communications networks (ECNs) will only accept orders from its subscribers, and attempt to match buy and sell orders internally. Fees are typically lower than traditional brokerage commissions. Textbook Reference: Please see textbook section 9.3.5.2

Which of the following best characterizes an ECN? A) Typically charges higher than usual brokerage fees owing to its advanced technology. B) Accepts orders from the general public. C) Available for trade executions during regular market hours only. D) Accepts orders from its subscribers only, typically broker-dealers or institutional clients.

A) The placement of orders to buy XYZ stock with the hope of enticing others to place buy orders for XYZ, thereby enabling the first trader to benefit by trading against the subsequent orders Answer Explanation: Spoofing is the practice of entering orders to entice other participants to join on the same side of the market, and then trading against the other market participants orders. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes. Textbook Reference: Please see textbook section 9.5.10

Which of the following best defines spoofing? A) The placement of orders to buy XYZ stock with the hope of enticing others to place buy orders for XYZ, thereby enabling the first trader to benefit by trading against the subsequent orders. B) Telling a client that you intend to place an order to buy DEF stock when you have no intention of actually doing so, in the hopes that the client will buy the shares and drive the price higher, allowing you to sell your shares at a profit. C) Entering a quote for JKL stock without having a clear trading strategy. D) Placing an order to buy ABC stock the day before a favorable research report on ABC is released.

A) The placement of orders to buy XYZ stock with the hope of enticing others to place buy orders for XYZ, thereby enabling the first trader to benefit by trading against the subsequent orders. Answer Explanation: Spoofing is the practice of entering orders to entice other participants to join on the same side of the market, and then trading against the other market participants orders. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes. Textbook Reference: Please see textbook section 9.5.10

Which of the following best defines spoofing? A) The placement of orders to buy XYZ stock with the hope of enticing others to place buy orders for XYZ, thereby enabling the first trader to benefit by trading against the subsequent orders. B) Telling a client that you intend to place an order to buy DEF stock when you have no intention of actually doing so, in the hopes that the client will buy the shares and drive the price higher, allowing you to sell your shares at a profit. C) Placing an order to buy ABC stock the day before a favorable research report on ABC is released. D) Entering a quote for JKL stock without having a clear trading strategy.

C) Interest in a pool of mortgages, backed by mortgage loans Answer Explanation: A mortgage-backed security represents investments in a pool of mortgages, backed by specific mortgage loans. Textbook Reference: Please see textbook section 3.3.1

Which of the following best describes a mortgage-backed security? A) Common stock of a bank that issues mortgages B) A mortgage held by a homeowner, secured by the home purchased with the mortgage C) Interest in a pool of mortgages, backed by mortgage loans D) Bonds purchased with the proceeds from the sale of a home after a mortgage has been paid off

A) The sale of shares by an institutional investor Answer Explanation: An example of a secondary offering is where existing investors are selling some or all of their shares in to the open marketplace. Textbook Reference: Please see textbook section 8.3.1

Which of the following best describes a secondary offering? A) The sale of shares by an institutional investor B) An offering of new stock by a public company C) A private company offering shares to the public for the first time D) The offering of shares following the company IPO

A) An offer by an issuer or shareholder to investors to purchase a certain number of their shares at a specific price, during a specified time period. Answer Explanation: A tender offer is an offer made to company shareholders to purchase a certain amount of their stock at a specified price, usually a premium to the current market price of those shares. The goal is for one party to gain additional control of the company's shares, and ultimately, of corporate decision making. Textbook Reference: Please see textbook section 8.2.6.1

Which of the following best describes a tender offer? A) An offer by an issuer or shareholder to investors to purchase a certain number of their shares at a specific price, during a specified time period. B) An offer by a mutual fund to purchase a block of the issuer's shares in an upcoming follow-on offering. C) An institutional investor has notified the company that it will be liquidating a significant number of its shares during the next two weeks. D) An issuer has filed a registration statement with the SEC to issue new stock to the public.

D) Long-term bond fund Answer Explanation: Long-term bond funds typically invest in bonds that have a term to maturity of 10 years or longer. The longer the term to maturity, the greater the volatility in the bond's price. Textbook Reference: Please see textbook section 4.2.4.4

Which of the following bond funds is likely to have the greatest volatility in its NAV? A) Ultra-short term bond fund B) Intermediate term bond fund C) Short-term bond fund D) Long-term bond fund

C) 5 years Answer Explanation: Investors prefer a longer call date in order to better protect themselves from call and reinvestment rate risk. Textbook Reference: Please see textbook section 2.1.9

Which of the following call dates would be LEAST beneficial for an investor? A) 10 years B) 15 years C) 5 years D) 20 years

D) 20 years Answer Explanation: Investors prefer a longer call date in order to better protect themselves from call and reinvestment rate risk. Textbook Reference: Please see textbook section 2.1.9

Which of the following call dates would be MOST beneficial for an investor? A) 5 years B) 15 years C) 10 years D) 20 years

C) Investors will know the securities that comprise their units for as long as they hold the investment Answer Explanation: Investors in a UIT own units in a defined pool of securities that will be held until the date the trust is terminated. The units fluctuate in value based on the securities in the portfolio. Units can be sold back to the trust, and additional units can be purchased when there have been redemptions. The trust does not have subsequent IPOs. Textbook Reference: Please see textbook section 4.4.1.1

Which of the following characteristics applies to an investment in a UIT? A) Investors can add to their holdings through subsequent primary offerings of the trust B) The units can be easily liquidated through exchange trading C) Investors will know the securities that comprise their units for as long as they hold the investment D) The investor's units have a fixed value

C) Utility Answer Explanation: Defensive stocks, such as those of utilities, may be expected to perform best during a recession. Textbook Reference: Please see textbook section 10.2.5.1

Which of the following companies' stock might perform best during a recession? A) manufacturing B) Cruise lines C) Utility D) Home builder Answer Explanation: Defensive stocks, such as those of utilities, may be expected to perform best during a recession. Textbook Reference: Please see textbook section 10.2.5.1

A) Payable Answer Explanation: The key dates for dividend payments always follow the same order for regular way transactions: declaration, ex-dividend, record, payable. Remember the acronym DERP. Textbook Reference: Please see textbook section 1.7

Which of the following dates relating to dividends generally occurs last? A) Payable B) Ex-dividend C) Declaration D) Record

C) Warrants Answer Explanation: Warrants do not pay dividends. UITs, Mutual Funds, and ADRs all pay dividends from the underlying securities. Textbook Reference: Please see textbook section 1.1.1.7

Which of the following does not pay a dividend? A) ADR B) Unit investment trust C) Warrants D) Mutual fund

A) I, II, III, and IV Answer Explanation: Coupon refers to the annual interest rate ("pricing") paid on a debt obligation's principal amount outstanding. It can be based on either a floating rate (typical for bank debt) or a fixed rate (typical for bonds). Bank debt generally pays interest on a quarterly basis, while bonds generally pay interest on a semiannual basis. There are a number of factors that affect a debt obligation's coupon, including the type of debt (and its investor class), ratings, security, seniority, maturity, covenants, and prevailing market conditions. Textbook Reference: Please see textbook section 2.1.6

Which of the following factors affect a debt obligation's coupon? I. Ratings II. Maturity III. Covenants IV. Security A) I, II, III, and IV B) I, II, and III only C) I and II only D) I only

C) The client's marital status Answer Explanation: The client's tax status, investment objectives, and the time horizon for the investment are all important factors in determining the suitability of an investment recommendation. Marital status is not as important. Textbook Reference: Please see textbook section 7.1.4

Which of the following factors is least important in determining a suitable recommendation? A) The client's tax status B) The time horizon for the investment C) The client's marital status D) The investment objectives of the client

D) Interest rates Answer Explanation: Interest rates have the greatest influence on the price of a bond, more so than market demand, credit ratings, and the earnings potential of the business. Textbook Reference: Please see textbook section 2.3.1

Which of the following factors is most impactful on the price of a bond? A) Market demand B) Credit rating C) Earnings potential D) Interest rates

D) II and IV Answer Explanation: Both the New York Stock Exchange and the Nasdaq Stock Market have initial and ongoing listing requirements. Neither the Pink Sheets nor the OTC Bulletin Board have listing standards, although the SEC requires companies to be current in their filings before their stock can be quoted on the OTCBB. Textbook Reference: Please see textbook section 9.3.1

Which of the following impose listing standards on issues of securities before they can begin trading? I. OTCBB II. NYSE III. Pink Sheets IV. Nasdaq A) I and IV B) II and III C) I and III D) II and IV

B) State of MI GO bond Answer Explanation: The term "tax free investment" is used to describe municipal bonds which have a federal tax exemption for interest income. Textbook Reference: Please see textbook section 3.5

Which of the following investments is considered a tax free investment? A) U.S. Treasury bond B) State of MI GO bond C) TIPS D) Ginnie Mae pass through security

D) Private activity bond Answer Explanation: Because private activity bonds are actually for the benefit of a private corporation, their interest is fully taxable, and subject to the AMT tax calculation. Textbook Reference: Please see textbook section 3.4.5.3

Which of the following investments is most likely subject to Alternative Minimum Tax? A) VRDO B) BAB C) TIP D) Private activity bond

C) The business plan of the issuer and its ability to execute Answer Explanation: Although the business plan of the issuer may impact its financial health if it is unsuccessfully executed, the factors most directly related to the rating assessed by a bond rating agency are the issuer's financial health, and the issuer's ability to pay its debts on time, which may be influenced by the amount of debt the issuer carries. A company's execution of its business plan is more likely to impact its stock price. Textbook Reference: Please see textbook section 2.3.5

Which of the following is LEAST likely to impact a bond's credit rating? A) The ability of the issuer to pay debt obligations in a timely manner B) The financial health of the issuer C) The business plan of the issuer and its ability to execute D) The amount of debt that an issuer carries on its balance sheet

D) Its coupon yield will be higher than its current yield Answer Explanation: Coupon yield stays constant over the life of a bond while current yield changes with bond's market price. If a bond is trading above face value, its current yield will be lower than its coupon yield. If a bond is trading below face value, current yield will be the greater of the two. Current yield goes up as bond prices decrease, and vice versa. Textbook Reference: Please see textbook section 2.2.5

Which of the following is TRUE of the yield of a bond that is trading at a price that is $80 more than its face value? A) Its current yield will be $80 less than its coupon yield B) Its current yield will be higher than its coupon yield C) Its current yield will be the same as its coupon yield D) Its coupon yield will be higher than its current yield

C) Interest rates Answer Explanation: Interest rates are a lagging indicator. The inventory/sales ratios, personal income and consumer spending are all coincident indicators. Textbook Reference: Please see textbook section 10.1.4.2

Which of the following is a lagging indicator? A) Consumer spending B) Industrial production index C) Interest rates D) Personal income

A) Interest rates Answer Explanation: Interest rates have a significant impact on the prices of bonds because a bond's price changes as the bond's interest rate differs from prevailing market interest rate. When prevailing market interest rates are higher than a bond's interest rate the price of the bond will fall. If the bond's interest rate is higher than the prevailing market interest rate the price of the bond will increase. This relationship is called an "inverse relationship" because when one goes up, the other goes down. Textbook Reference: Please see textbook section 2.1.6

Which of the following is a major factor in determining the price of long-term bonds? A) Interest rates B) number of outstanding shares of common stock C) Discounts and premiums D) Bid-ask spreads

C) STRIP Answer Explanation: A STRIP is a type of zero-coupon bond. It is a bond backed by the interest and principal payments of a US Government bond or note. These securities are issued at discounts and mature at par (face) value. Textbook Reference: Please see textbook section 3.2.1.5

Which of the following is an example of a zero-coupon bond? A) CMO B) ADR C) STRIP D) REIT

B) Pink Sheets Answer Explanation: The Pink Sheets have the least stringent requirements for inclusion for trading equity securities. Companies that are delisted from other exchanges may trade on the OTCBB or Pink Sheets, but the Pink Sheets are the least regulated. Currencies, not equities, trade on the FOREX. Textbook Reference: Please see textbook section 9.3.4.2

Which of the following is considered the least regulated market for a publicly traded equity? A) Nasdaq B) Pink Sheets C) OTCBB D) FOREX

D) 0.0001 Answer Explanation: It is important to note that this answer is as a pecentage. One basis point is equal to .01%, or .0001. There are 100 basis points in 1%. To convert basis points to a percentage, move the decimal two places to the left. To convert basis points to a decimal, move the decimal point four places to the left. So, 1 basis point becomes .01%, or 0.0001. Textbook Reference: Please see textbook section 2.1.7

Which of the following is equal to 1 basis point? A) 0.000001 B) 0.001 C) 0.0000001 D) 0.0001

C) Hedge Fund Answer Explanation: A hedge fund is not a type of Investment Company. The others are all registered with the SEC as Investment Companies. Textbook Reference: Please see textbook section 5.3

Which of the following is not a type of Investment Company? A) Management Company B) Unit Investment Trust C) Hedge Fund D) Face amount certificate Answer Explanation: A hedge fund is not a type of Investment Company. The others are all registered with the SEC as Investment Companies. Textbook Reference: Please see textbook section 5.3

A) The uncle of a restricted person Answer Explanation: Restricted persons may include immediate family members of restricted persons. Under the IPO rule, immediate family does not include the grandparents or aunts/uncles of a restricted person. Textbook Reference: Please see textbook section 8.3.6

Which of the following is not an example of a restricted person under FINRA rules? A) The uncle of a restricted person B) The brother-in-law of a restricted person C) The child of a restricted person D) The spouse of a restricted person

B) American Depository Receipts Answer Explanation: American Depository Receipts (ADRs) are used by non-U.S. companies to enable U.S. investors to purchase shares of their company's stock and forthat stock to trade on a U.S. stock exchange. ADRs are issued by a U.S. depository bank and are quoted and pay dividends in U.S. dollars. American Depository Shares (ADSs) refer to the individual shares of an ADR. Though ADSs represent claims on foreign shares, they are subject to fluctuations in currency prices. Global Depository Receipts (GDRs) are blank certificates issued by a bank that represent shares of a stock that are traded on a foreign stock exchange. Global Depository Shares (GDSs) refer to the individual shares of a GDR. Textbook Reference: Please see textbook section 1.4.1

Which of the following is the mechanism through which shares of non-U.S. companies trade on U.S. stock exchanges? A) Global Depository Shares B) American Depository Receipts C) American Depository Shares D) Global Depository Receipts

D) Portfolio is professionally managed Answer Explanation: Both mutual fund and closed-end funds have a professional investment advisor that manages the fund to meet its investment objectives. Textbook Reference: Please see textbook section 4.6

Which of the following is true of both closed-end funds and mutual funds? A) Fixed number of shares B) Shares are priced based on supply and demand C) Amount of capital is fixed D) Portfolio is professionally managed

C) Their credit quality is second to that of U.S. Treasuries. Answer Explanation: Agency securities such as Ginnie Mae and Fannie Mae are second in credit quality to that of U.S. Treasuries. Due to the underlying mortgages, they do carry pre-payment risk. Also, they are quoted in 1/32nds. Textbook Reference: Please see textbook section 3.3.1

Which of the following is true regarding U.S. Government Agency Securities? A) They do not carry pre-payment risk. B) The market value is guaranteed by the U.S. Government. C) Their credit quality is second to that of U.S. Treasuries. D) They are quoted in 1/8ths. Answer Explanation: Agency securities such as Ginnie Mae and Fannie Mae are second in credit quality to that of U.S. Treasuries. Due to the underlying mortgages, they do carry pre-payment risk. Also, they are quoted in 1/32nds. Textbook Reference: Please see textbook section 3.3.1

C) I and III Answer Explanation: When a bond is called away, the investor will receive any call premium (as stated in the bond's indenture). Though a call premium is common, it is not required. The investor will also receive any interest accrued since the last coupon payment. Textbook Reference: Please see textbook section 2.1.9

Which of the following is true regarding redemption of a bond? I. If a bond is called away prior to maturity the investor may receive a call premium. II. If a bond is called away prior to maturity the investor always receives a call premium. III. If a bond is called away prior to maturity the investor receives the final interest upon redemption. IV. If a bond is called away prior to maturity the investor forfeits any interest accrued since the previous coupon payment. A) II and III B) II and IV C) I and III D) I and IV

C) Investment knowledge Answer Explanation: A client's investment knowledge would be the least important item among these choices when considering the Know-your-customer rule. Textbook Reference: Please see textbook section 7.1.4

Which of the following items about a customer is least important pursuant to the Know-you-customer rule? A) Risk tolerance B) Net worth C) Investment knowledge D) Employment status

D) Declaration of a cash dividend to stock holders Answer Explanation: The declaration of a cash dividend would be reflected on a company balance sheet, not the income statement. Textbook Reference: Please see textbook section 10.2.6.1

Which of the following items is not reported on a company's income statement? A) Operating expenses B) Corporate sales C) Income net of expenses and interest paid to bondholders D) Declaration of a cash dividend to stock holders

B) Trust Indenture Act of 1939 Answer Explanation: The Trust Indenture Act of 1939 exclusively regulates corporate debt securities and requires that a trust indenture be established between the issuer and the trustee on behalf of the bondholders to protect the bondholders' rights. Textbook Reference: Please see textbook section 3.1.1

Which of the following legislative acts exclusively regulates debt securities? A) Securities Exchange Act of 1934 B) Trust Indenture Act of 1939 C) Securities Act of 1933 D) Investment Advisers Act of 1940

B) Mutual fund shares Answer Explanation: Mutual funds shares are continuous primary offerings, which means that all purchases are new shares. Because the shares are new, purchasers must receive a prospectus no later than with the confirmation of sale. Fixed annuities are not securities, so no prospectus is required. Textbook Reference: Please see textbook section 4.2.1

Which of the following must be sold with a prospectus? A) U.S. Treasury bonds B) Mutual fund shares C) Stock that is currently listed on the NYSE D) Fixed annuities

D) Letter of Intent Answer Explanation: A letter of intent is a feature that offers breakpoint discounts on all mutual fund purchases within a 13-month period. All of the purchases are aggregated to determine the sales charge that applies. Textbook Reference: Please see textbook section 4.2.5.5

Which of the following mutual fund features allows an investor to receive a sales charge discount on a current purchase by combining it with future purchases within the next 13 months? A) Rights of accumulation B) Conversion privilege C) Combination privilege D) Letter of Intent

B) The price at which the order will be executed Answer Explanation: A market order specifies the security symbol and number of shares to buy or sell. The time at which the order will be executed, in full, is understood (implied) to be immediately. No price is specified or implied. Textbook Reference: Please see textbook section 9.4.2

Which of the following pieces of information is not communicated, explicitly or implicitly, in a market order? A) The security symbol to be bought B) The price at which the order will be executed C) The number of shares to buy or sell D) The time at which the order will be executed Answer Explanation: A market order specifies the security symbol and number of shares to buy or sell. The time at which the order will be executed, in full, is understood (implied) to be immediately. No price is specified or implied. Textbook Reference: Please see textbook section 9.4.2

D) American depository shares Answer Explanation: American depository shares are considered equities, whereas all money market instruments are short-term debt products. Textbook Reference: Please see textbook section 4.2.4.2

Which of the following products would not be found in a money market fund? A) Commercial paper B) Negotiable certificates of deposit C) Treasury bills D) American depository shares Answer Explanation: American depository shares are considered equities, whereas all money market instruments are short-term debt products. Textbook Reference: Please see textbook section 4.2.4.2

D) Antifraud provisions regarding disclosure to potential investors Answer Explanation: Municipal securities issuers are exempt from filing registration statements with the SEC, but cannot withhold or intentionally mislead investors with regard to information that is essential to an investment decision. The antifraud provisions of the Act of 1933 apply to municipal issuers. Insider trading provisions are found in the Securities Exchange Act of 1934, along with prohibited practices in the sale of securities like guarantees against loss. Textbook Reference: Please see textbook section 8.1

Which of the following provisions of the Securities Act of 1933 applies to municipal securities? A) Guarantees against loss in the sales of securities B) Requirement to file a registration statement with SEC C) Inside information provisions D) Antifraud provisions regarding disclosure to potential investors

B) BB Answer Explanation: Investment grade is considered average credit worthiness. Bonds below investment grade are considered speculative. For Moody's, bonds rated below Baa are below investment grade; for S&P bonds rated below BBB are below investment grade. S&P's rating of BB is the rating that is below investment grade. Textbook Reference: Please see textbook section 2.3.5.1

Which of the following ratings is below investment grade? A) Baa B) BB C) BBB D) A

B) Treasury bill Answer Explanation: Next to cash, a Treasury security is the most highly liquid security. Textbook Reference: Please see textbook section 7.3.5

Which of the following securities is the most liquid? A) Limited partnerships B) Treasury bill C) Alternative investments traded OTC D) Highly-rated municipal bond

Answer Explanation: Senior subordinated notes, or any corporate bond security, are typically listed on a highly regulated, electronic bond trading platform exchange such as the NYSE Bonds Trading Platform. OTCBB securities include foreign equity issues, warrants, ADRs, and DPPs. Textbook Reference: Please see textbook section 9.3.4.1

Which of the following securities would not be listed on the OTCBB? A) Senior Subordinated Notes B) American Depository Receipts C) Warrants D) Direct Participation Programs Answer Explanation: Senior subordinated notes, or any corporate bond security, are typically listed on a highly regulated, electronic bond trading platform exchange such as the NYSE Bonds Trading Platform. OTCBB securities include foreign equity issues, warrants, ADRs, and DPPs. Textbook Reference: Please see textbook section 9.3.4.1

A) I and III Answer Explanation: Warrants are often added to bonds as sweeteners to make the issue more attractive to investors. Like a call option, they give the holder the right to buy a specified number of shares of stock at a specified price. However, they have a longer expiration period than options Â- sometimes up to 15 years. Though some warrants are listed on exchanges, most trade over-the-counter. Textbook Reference: Please see textbook section 1.1.1.7

Which of the following statements about warrants are TRUE? I. They may be sold with a bond as a sweetener II. They have shorter expiration periods than options III. They function very much like call options IV. They trade exclusively on exchanges A) I and III B) II and IV C) I and IV D) II and III

A) I and IV Answer Explanation: A yield curve is inverted when long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession and significant turning points in the business cycle. An inverted yield curve predicts lower interest rates in the future as longer-term bonds are being demanded, sending the yields down. Textbook Reference: Please see textbook section 10.2.2

Which of the following statements are true regarding an inverted yield curve? I. It depicts that long-term debt instruments have a lower yield than short-term debt instruments II. It is considered to be a predictor of economic expansion. III. It is more common than a normal yield curve IV. It generally predicts lower interest rates in the future A) I and IV B) II and III C) II and IV D) I and III

C) Preferred stock is less risky than common stock and has less growth potential. Answer Explanation: Preferred stock has both risk and growth potential. However, both are lower than in common stock, making preferred stock a more conservative investment. Textbook Reference: Please see textbook section 1.5.3

Which of the following statements best describes the risk and reward profile of preferred stock versus common stock? A) Preferred stock is not risky and has no growth potential. B) Preferred stock is more risky than common stock but has about the same growth potential. C) Preferred stock is less risky than common stock and has less growth potential. D) Preferred stock is less risky than common stock and has about the same growth potential.

D) They may issue senior securities like preferred stock or debentures Answer Explanation: Closed-end companies may raise capital through the sale of common shares and senior securities like preferred stock or debentures. They issue shares through their IPO, and the number of shares is fixed. Their shares are not redeemed; investors liquidate them by selling them to other investors on exchanges. The NAV calculation is not required each business day. Textbook Reference: Please see textbook section 4.3.2.5

Which of the following statements describes a feature of a closed-end fund? A) They must redeem shares within 7 days of request B) New shares are issued continually C) They must calculate their NAV every business day D) They may issue senior securities like preferred stock or debentures

C) The bond is most likely to be called to save interest expense. Answer Explanation: Bonds are most likely to be called to save interest expense. It is most advantageous to an issuer to call bonds that are paying more interest than bonds that are already outstanding. Such bonds would be trading at a premium. Bonds are called at par, although at times a call premium is paid. Interest is no longer paid after a call. Textbook Reference: Please see textbook section 2.1.9

Which of the following statements is true about a callable bond that is trading at a premium? A) The bondholder will receive less than par value if the bond is called. B) Because the bond is callable the coupon rate of the bond is probably lower than comparable non-callable bonds. C) The bond is most likely to be called to save interest expense. D) The bond's CY is lower than its YTM. Answer Explanation: Bonds are most likely to be called to save interest expense. It is most advantageous to an issuer to call bonds that are paying more interest than bonds that are already outstanding. Such bonds would be trading at a premium. Bonds are called at par, although at times a call premium is paid. Interest is no longer paid after a call. Textbook Reference: Please see textbook section 2.1.9

C) An aggressive growth fund Answer Explanation: Growth objectives are usually satisfied by stock. The manager of an aggressive growth fund seeks stocks that are likely to have greater growth potential than the market overall. These are typically stocks of small to mid-sized company. Textbook Reference: Please see textbook section 4.2.4.5

Which of the following types of mutual funds is most likely to include only equity investments in its investment portfolio? A) A money market fund B) An asset allocation fund C) An aggressive growth fund D) A high yield fund

D) Credit risk Answer Explanation: Credit risk, or the risk of default, is a business risk that is associated with investing in a particular product, company, or industry sector. Market risk, or systemic risk, involves factors that affect the overall economy or securities markets, potentially causing a decline in the value of an individual investment in a company regardless of the company's growth, revenues and earnings. Currency risk involves the risk of fluctuation in exchange rates; country risk is the potential for change in a country's government, social policies, or even war; sociopolitical risk is the market response to political and social events such as a terrorist attack, war, pandemic, or elections

Which of the following types of risks associated with an investment in foreign securities is considered a business risk rather than a market risk? A) Sociopolitical risk B) Currency risk C) Country risk D) Credit risk

A) 80% of the securities are sold to state residents Answer Explanation: To comply with Rule 147 and avoid registration with the SEC, the company must have its principal place of business in the state and the offering must be sold entirely to state residents. Additionally, the issuer must meet one of the following requirements: 80% of the proceeds used in the state, 80% of the assets located in the state, 80% of the revenues generated in the state, or a majority of the employees are located in the state. Textbook Reference: Please see textbook section 8.2.2

Which of the following would NOT allow the issuer to qualify for an exemption under the provisions of Rule 147? A) 80% of the securities are sold to state residents B) The issuer performs at least 80% of it business operations within the state C) The issuer's home office is in the state of issue D) The issuer uses at least 80% of the funds raised to conduct business within the state

Answer Explanation: Personal income is a coincident economic indicator that is likely to occur at the same time as a decrease in the GDP. Increases in industrial production and retail sales and declining inventories indicate improving economic conditions. Textbook Reference: Please see textbook section 10.1.2

Which of these events is most likely to accompany a decline in personal income? A) A decrease in the GDP B) A decline in inventories C) An increase in industrial production D) An increase in retail sales

D) U.S. Treasuries Answer Explanation: U.S. Treasury securities are debt instruments issued by the U.S. Government. They are backed by the government's full faith and credit. Textbook Reference: Please see textbook section 3.2

Which segment of the U.S. fixed income market issues bonds, notes and bills that are 100% backed by the U.S. Government's full faith and credit? A) Mortgage-backed securities B) Corporate debt C) Municipal debt D) U.S. Treasuries

B) secured lenders, general creditors, limited partners, general partners Answer Explanation: Remember that partners come last in line, behind secured lenders and general creditors. Limited partners then come ahead of general partners. Textbook Reference: Please see textbook section 5.2.4

Which sequence correctly describes the order of liquidation in a limited partnership? A) limited partners, lenders, creditors, general partner. B) secured lenders, general creditors, limited partners, general partners. C) limited partners come last, and all other entities have an equal priority. D) general partners, limited partners, general creditors, secured lenders

D) Bonds with shorter maturities have lower coupons. Answer Explanation: Short term bonds are considered less risky than long term bonds, so they have lower coupon rates than long term bonds. Short term bond prices also fluctuate less than long term bond prices when interest rates change. Textbook Reference: Please see textbook section 2.1.8

Which statement about bonds with short term maturities is correct? A) When interest rates decrease, the prices of longer term bond will increase less than price of short term bonds. B) Prices of short term bonds fluctuate more than prices of long term bonds. C) Short term bonds are usually more risky investments than long term bonds. D) Bonds with shorter maturities have lower coupons.

D) Mutual funds are limited to issuing one type of equity shares. Answer Explanation: Mutual funds are limited to a single type of equity share. They can issue common shares only, not preferred shares or debt securities. Textbook Reference: Please see textbook section 4.2.3

Which statement about mutual fund securities is true? A) Mutual funds are required to issue multiple classes of equity shares. B) Mutual funds are limited to issuing common and preferred shares. C) Mutual funds may issue common stock, preferred stock or debt securities. D) Mutual funds are limited to issuing one type of equity shares

B) The bond trades flat. Answer Explanation: Bonds in default trade flat, meaning they do not trade with accrued interest. Textbook Reference: Please see textbook section 2.4

Which statement is true when a bond is in default? A) The price of the bond remains relatively stable regardless of market conditions. B) The bond trades flat. C) There is no commission payable on the transaction. D) It is trading at par. Answer Explanation: Bonds in default trade flat, meaning they do not trade with accrued interest. Textbook Reference: Please see textbook section 2.4

C) II and IV Answer Explanation: The general consensus by economists is that low inflation and steady economic growth are desirable economic performance. Textbook Reference: Please see textbook section 10.3.3.1

Which two of the following are the general objectives of economic policy? I. Zero inflation II. Low inflation III. High growth IV. Steady growth A) II and III B) I and III C) II and IV D) I and IV

D) III and IV Answer Explanation: Expenses that apply to closed-end company shares include a fund administration fee and potential sales commissions when shares are purchased through a registered representative. 12b-1 fees and surrender charges do not apply. Textbook Reference: Please see textbook section 4.3.2.3

Which two of the following charges apply to the purchase of closedend fund shares? I. 12 b-1 fees II. Surrender charges III. fund administrative costs IV. Sales commission A) I and II B) I and III C) II and III D) III and IV

A) I and III Answer Explanation: The CUSIP number facilitates the clearing and settlement process for securities. The underwriter of a new issue of municipal securities is responsible for requesting the CUSIP number from the MSRB. CUSIP numbers must appear on transaction confirmations to ensure that securities that are delivered match the securities that are purchased. Textbook Reference: Please see textbook section 8.4.4

Which two of the following statements about CUSIP numbers are TRUE? I. They are issued by the MSRB II. They are not required on trade confirmations. III. They are used primarily to identify securities in the clearance and settlement process IV. Issuers of new municipal securities are responsible for obtaining the CUSIP number

B) II and IV Answer Explanation: Private placement REITs are exempt from SEC registration. They can therefore be sold to accredited investors only. Private REITs are also unlisted, which means that they are not eligible for trading on exchanges because they do not meet listing requirements. Instead that are traded OTC. Textbook Reference: Please see textbook section 5.1.3

Which two of the following statements about public REITs and private placement REITs are TRUE? I. They must both register with the SEC II. Only public REITs must register with the SEC III. Both trade on exchanges IV. Private REITs are unlisted A) II and III B) II and IV C) I and III D) I and IV

C) II and III Answer Explanation: Equity UITs issue as many units as necessary during their IPO, while bond UITs issue a fixed number of units during their IPO, while Both bond and equity trusts often pay monthly dividends. Textbook Reference: Please see textbook section 4.4.3

Which two of the following statements are TRUE regarding equity UITs? I. They issue a set number of units and their offerings are then closed II. They issue as many units as necessary to complete their IPO III. They often pay monthly dividends IV. They have an unlimited life

B) I and IV Answer Explanation: Longer term bonds are more vulnerable to interest rate risk than short term bonds. The price impact of a small change in interest rates is greater on longer term bonds than on bonds with a short term maturity. Textbook Reference: Please see textbook section 2.3.1

Which two of the following statements are TRUE regarding interest rates and bond maturities? I. Longer term bonds are more sensitive to interest rate risk II. Shorter term bonds are more sensitive to interest rate risk III. A small change in interest rates has a greater impact on the price of a short-term bond IV. A small change in interest rates has a greater impact on the price of a long-term bond. A) II and III B) I and IV C) II and IV D) I and III

B) I and III Answer Explanation: Municipal securities pay interest that is generally tax exempt at the federal level, and may also be exempt at the state tax level. Capital gains are fully taxable. Textbook Reference: Please see textbook section 3.4.5.2

Which two of the following statements correctly state the tax treatment that applies to municipal securities? I. Capital gains are fully taxable II. Capital gains are tax deductible III. Interest payments are generally tax free at the federal level IV. Interest payments are taxable at the federal level but exempt at the state level. A) I and IV B) I and III C) II and III D) II and IV

B) II and III Answer Explanation: Closed-end fund shares issue a limited number of shares through IPOs. To receive cash for their shares, investors sell closed-end company shares in secondary market transactions on exchanges. They are not redeemed by their issuer, like mutual fund shares. Textbook Reference: Please see textbook section 4.3

Which two of the following statements describe closed-end funds? I. They are a continuous primary offering II. There is a fixed number of shares III. Shares are liquidated through exchange trading IV. Shares are redeemed by the fund A) II and IV B) II and III C) I and IV D) I and III

B) III and IV Answer Explanation: Regular way settlement for U.S. Treasury securities is trade date + 1 business day; for municipal securities regular way settlement is T + 2. Cash settlement for both U.S. Treasury and municipal securities is the same day as the trade date. Textbook Reference: Please see textbook section 2.4

Which two of the statements below define settlement terms of U.S. government and municipal securities? I. Regular way settlement for U.S. Treasury securities is T + 3. II. Regular way settlement for municipal securities is T + 1. III. Cash settlement for municipal securities is the same day as the trade. IV. The terms of cash settlement for municipal securities and U.S. Treasury securities are the same A) I and III B) III and IV C) I and II D) II and IV

C) High-yield bonds Answer Explanation: Credit risk describes the possibility that a bond issuer will default miss a scheduled payment of principal or interest. The risk is highest in lower quality bonds, such as high-yield bonds. Textbook Reference: Please see textbook section 7.2.4

Which type of bond investment is most vulnerable to credit risk? A) US Government agency bonds B) US Treasury bonds C) High-yield bonds D) High-grade corporate bonds

D) A bond purchased at a discount Answer Explanation: When a bond is purchased for a discount, the cost basis must be accreted each year. Accretion means that the cost basis of the bond must be adjusted upward toward par each year so that at maturity the investor's cost basis will equal par of $1,000. Textbook Reference: Please see textbook section 2.5

Which type of bond must be accreted towards par each year? A) A bond purchased at a premium B) A bond purchased at par C) A municipal bond D) A bond purchased at a discount

B) Closed-end company Answer Explanation: Closed-end companies issue a single share class of securities only; mutual funds commonly issue Class A, B and C shares. Closed-end shares trade on exchanges at a discount or premium to NAV; UITs are redeemed by the trust. Textbook Reference: Please see textbook section 4.3.2.2

Which type of investment company product issues a single class of shares only and trades on the market at a discount or premium to its NAV? A) Open end company B) Closed-end company C) Both closed-end companies and UITs D) Unit investment trust

B) A borrower with a bank deposit account Answer Explanation: BAs are issued by borrowers, typically companies, and guaranteed (accepted as an obligation) by a commercial bank. Technically, they are time drafts drawn on deposit accounts at banks. The deposit accounts serve as the bank's collateral. Textbook Reference: Please see textbook section 3.6.3

Who is the issuer of a banker's acceptance? A) The FDIC B) A borrower with a bank deposit account C) A commercial bank D) The Depository Trust Corp

B) A recommendation is unsuitable if the customer does not have the financial ability to support it Answer Explanation: The customer's financial ability to pay for a transaction is a key quantitative suitability factor. The MSRB does not have specific guidelines to test for quantitative suitability. Individual transactions should be evaluated in terms of their size and impact on the total portfolio in determining suitability. Textbook Reference: Please see textbook section 7.1.3

With regard to evaluating quantitative suitability, which of the following statements is TRUE? A) Recommendations must be evaluated individually and should not be viewed in conjunction with other portfolio activity. B) A recommendation is unsuitable if the customer does not have the financial ability to support it C) MSRB rules include specific guidelines for determining when turnover rates, transaction costs and other trading techniques are inappropriate for a customer's account D) A transaction should not be considered suitable unless a large concentration of the security is appropriate for the account

Answer Explanation: As with mutual fund and other equity investments, there is no guarantee that LGIPs will be fully liquid or will not suffer loss of principal. There are stable value LGIPs that strive to maintain a net asset value of $1.00 per share like money market mutual funds, but there is no guarantee to investors. Investment managers of LGIPs are typically paid from a fee charged based on the assets under management. Textbook Reference: Please see textbook section 5.6.1.1

With regard to investment options and management of LGIPs, all of the following statements are true EXCEPT A) LGIP investment managers are often paid from a fee based on the assets under management B) Some LGIPs invest in longer term securities to provide investment growth potential C) Stable value LGIPs strive to maintain a constant net asset value per share of $1.00. D) Full liquidity and return of principal is guaranteed to investors in LGIP securities

B) The taxing authority of municipalities varies widely depending on applicable state or local laws. Answer Explanation: Municipal taxing authority and statutes that address types and amounts of taxes vary considerably. Most local government bond issues require voter approval or referendums before they can be issued. States typically rely on sales or income taxes for backing of bond issues. A low debt limit is typically viewed more favorably because the municipality potentially has less outstanding debt to service. Textbook Reference: Please see textbook section 3.4.1

With regard to municipal taxing authority, which of the following statements is TRUE? A) A high debt limit is viewed as a greater sign of safety than a low debt limit. B) The taxing authority of municipalities varies widely depending on applicable state or local laws. C) Most cities and counties may issue GO bonds without voter referendums. D) States usually rely on property taxes to back GO bond issues.

D) Shares may be sold at a discount or premium to their NAV Answer Explanation: Closed-end company shares trade in the secondary market on exchanges. Their prices are determined by supply and demand and may be priced at a premium or discount to their NAV. Textbook Reference: Please see textbook section 4.3.2.2

With regard to the price of closed-end fund shares held by investors which of the following statements is TRUE? A) Shares are sold at a discount when the securities in the fund have increased in value relative to their NAV B) The price is set by formula each business day C) Shares are sold at the price calculated at the close of business on that day D) Shares may be sold at a discount or premium to their NAV

D) Common stock, bonds and preferred stock Answer Explanation: Closed-end funds may issue 'senior securities', such as preferred stock and bonds, as opposed to open-end funds which may only issue common stock to raise capital. Textbook Reference: Please see textbook section 4.3.2.5

With respect to raising capital, closed-end funds may issue A) common stock only B) common and preferred stock only C) bonds only D) Common stock, bonds and preferred stock

C) is acting as an agent and carries no responsibility for unsold shares.

In a best efforts underwriting arrangement, the underwriter A) is acting as a principal and is responsible for any unsold shares. B) is acting as a fiduciary and is required to purchase for its own account any shares it is unable to sell to the public. C) is acting as an agent and carries no responsibility for unsold shares. D) is required to sell a minimum quantity of shares , as stipulated in the underwriting agreement.

A) the difference between the sale price and higher repurchase price. Answer Explanation: A repo is a contractual agreement between two parties, in which securities are sold and then later repurchased at a higher price. The difference in price is interest to the lender. Textbook Reference: Please see textbook section 3.6.4

In a repurchase agreement (repo), the interest amount is calculated as A) the difference between the sale price and higher repurchase price. B) a fixed percentage of the purchase price. C) a flat dollar amount, quoted at the time or repurchase. D) a variable percentage of the purchase price, tied to T-bill rates.

D) front-running. Answer Explanation: Front-running is the prohibited practice of entering personal trades ahead of customer trades to attempt to capture a better price. Textbook Reference: Please see textbook section 9.5.7

A review of customer account activity shows that a representative and a number of her customers have made similar trades in ABC securities. The trades for the customers have been entered after those made for the account of the representative. This activity may indicate the prohibited practice of A) commingling. B) selling away. C) churning. D) front-running.

A) in a rights offering Answer Explanation: A standby underwriting is used in a rights offering. In a standby underwriting, a bank stands ready to sell any unsold shares after all shareholders have exercised their right to maintain a proportionate interest in the company. Textbook Reference: Please see textbook section 8.3.3

A standby underwriting is used A) in a rights offering B) in a best-efforts underwriting C) for a company going public for the first time D) in a secondary offering

B) No intervention occurs. Answer Explanation: The economy will reach its point of natural equilibrium without any outside forces or interventions, according to the classical theory of economics, or laissez-faire economics. Textbook Reference: Please see textbook section 10.3.1.1

According to classical economic theory, the economy will reach a natural equilibrium if A) The federal government reduces its spending budget. B) No intervention occurs. C) The federal government decreases tax levels. D) The federal government injects cash into the banking system.

A) founder of classical economic theory Answer Explanation: Adam Smith is considered the founder classical economic theory. Textbook Reference: Please see textbook section 10.3.1.1

Adam Smith is most renowned in financial circles as the A) founder of classical economic theory B) creator of the first hedge fund C) first individual to own a seat on the New York Stock Exchange D) author of the first textbook describing how basic economics impacts the daily lives of individuals

C) It can be higher than $10,000 but not lower Answer Explanation: In TIPS, the interest payments and principal value at maturity are indexed to the Consumer Price Index for All Urban Consumers (CPI-U). At maturity, the TIPS holder can receive more than the original principal if inflation is positive. But he/she can't receive less than original principal if inflation is negative (deflation). Textbook Reference: Please see textbook section 3.2.1.4

Alice buys Treasury Inflation-Protected Securities (TIPS) with an original principal value of $10,000. She wants to know what the principal will be if she holds to maturity. The answer is A) It can be lower than $10,000 but not higher B) It can be either lower or higher than $10,000 C) It can be higher than $10,000 but not lower D) $10,000

A) their performance has no correlation to the overall performance of the economy

All of the following are characteristics of counter-cyclical stocks EXCEPT A) their performance has no correlation to the overall performance of the economy B) they often depreciate during times of economic expansion C) they can serve as a hedge to recessionary pressures that cause most stocks to decline D) the stock's price tends to move opposite the general economic trend

B) Exports Answer Explanation: Balance of trade is the difference between a country's exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. Textbook Reference: Please see textbook section 10.4.1

All of the following are debit items in the computation of the balance of trade EXCEPT A) Domestic investments abroad B) Exports C) Foreign aid D) Domestic spending abroad

A) providing checking accounts, savings accounts, and money market accounts The central bank is responsible for the monetary policy of a country. In that role it buys and sells securities from the government and also assists in regulating the banking industry. It does not act as a retail banking operation; so it does not offer checking accounts, savings accounts, or money market accounts to consumers. Textbook Reference: Please see textbook section 10.3.3

All of the following are roles of a central bank EXCEPT A) providing checking accounts, savings accounts, and money market accounts B) implementing monetary policy C) regulating and supervising the banking industry D) acting as banker for the government

D) Electric utilities Answer Explanation: Municipal governments like states, cities, towns, villages, and counties issue GO bonds to finance projects for the public good. Public schools also issue GO bonds for this purpose. Revenue bonds raise debt service from user fees. Public utilities and private sector corporations are common issuers of revenue bonds. Textbook Reference: Please see textbook section 3.4.1

All of the following are typical issuers of general obligation bonds EXCEPT A) School districts B) Villages C) States D) Electric utilities

D) transaction fees. Answer Explanation: The order ticket is completed prior to order execution and does not include transaction fees such as commissions, mark-ups, or mark-downs. Textbook Reference: Please see textbook section 9.4.1

All of the following items are included on an order ticket except the A) terms and conditions of the order. B) time the order was received. C) customer account number. D) transaction fees.

A) REITS must have a minimum of 90% of their total assets invested in real estate Answer Explanation: REITS are required to have a minimum of 75% of their asset invested in real estate and must derive at least 75% of their gross income from rents or mortgages. Except q Textbook Reference: Please see textbook section 5.1.1

All of the following statements about the structure of a REIT are true EXCEPT A) REITS must have a minimum of 90% of their total assets invested in real estate B) REITs must be jointly owned by a minimum of 100 persons C) REITS must be set up as a corporation D) REITS must have transferable interests Answer Explanation:

B) pump and dump. Answer Explanation: Pump and dump is a scheme that intends to raise the price of a stock by giving recommendations based on false or misleading information, the goal for the trader being to sell their shares at a higher price and earn a profit. This topic is not explicitly covered in the textbook, but as long as you review this rational for this question you will be covered for exam purposes. Textbook Reference: Please see textbook section 9.5.10

An individual holding a position in a security might attempt to raise the price of that security through recommendations based on misleading statements in an attempt to gain a profit through a process known as A) insider trading. B) pump and dump. C) spoofing. D) interpositioning.

A) A stockholder Answer Explanation: As a common stockholder, an individual would be entitled to receive financial reports directly from the corporation. Textbook Reference: Please see textbook section 1.1.1.3

An individual would receive an annual report of a corporation's recent results if they are A) A stockholder B) An attorney C) A creditor D) A bondholder

D) II and IV This is a secondary market transaction. Since a commission is charged, the trade was completed on an agency basis. Textbook Reference: Please see textbook section 9.2.1.2

An insurance company sells municipal bonds through a bank and pays commission on the transaction. This is a I. Primary market transaction II. Secondary market transaction III. Principal transaction IV. Agency Transaction A) II and III B) I and III C) I and IV D) II and IV

D) The price will decrease towards par. Answer Explanation: This bond has a coupon of 8.0% and a yield-to-maturity of 7.0%, indicating that the bond is trading at a premium. The price of a bond will always trend towards par as maturity approaches. Given that this bond is trading at a premium (e.g. 105% of par), the price would need to decrease to arrive at par value. Textbook Reference: Please see textbook section 2.1.8

An investor buys an 8.0% coupon bond to yield 7.0%. What will most likely happen to the price of the bond as maturity approaches? A) The price will remain constant. B) The price will increase towards par. C) The price will fall to zero. D) The price will decrease towards par.

C) Mutual fund Answer Explanation: A summary prospectus is used for a mutual fund purchase. This is an abbreviated version of the full (statutory) prospectus, which provides key information about the fund such as its investment objectives and goals, as well as its sales charges and expense ratio. The statutory prospectus must be available on request. Textbook Reference: Please see textbook section 4.2.1

An investor has received a summary prospectus from his registered representative. What security has the customer purchased? A) Variable annuity B) Real Estate Investment Trust (REIT) C) Mutual fund D) Direct participation program (DPP)

B) A type of MBS designed by a broker-dealer Answer Explanation: A CMO is mortgage-backed security, structured by a broker-dealer, divided into individual components called 'tranches'. Textbook Reference: Please see textbook section 3.3.2

An investor holding a Collateralized Mortgage Obligation (CMO) owns A) A US Government guaranteed bond B) A type of MBS designed by a broker-dealer C) A stock portfolio secured by a pool of mortgages D) A bond portfolio secured by a pool of housing stocks

C) reinvestment risk Answer Explanation: Issuers call bonds when interest rates decline, so they can refinance their debt at a lower rate. An investor who has a bond called away is subject to reinvestment risk, because the investor may have difficulty finding as good a deal for the money. Textbook Reference: Please see textbook section 2.3.3

An investor holds a callable bond that has been called by the issuer. This investor now faces A) interest rate risk B) call risk C) reinvestment risk D) credit risk

B) capital appreciation Answer Explanation: The investment objective of this investor is likely capital appreciation. Since the land is not developed, there will be no income, nor depreciation available on the land. Raw land cannot be depreciated. Textbook Reference: Please see textbook section 5.2.5

An investor is a participant in a raw land limited partnership. The likely investment objective of this individual is A) growth and income B) capital appreciation C) capital preservation D) tax-free income

B) Size of the fund Answer Explanation: The size of a particular fund is the least important factor amongst these items when choosing an appropriate mutual fund investment. Textbook Reference: Please see textbook section 4.2.4.1

An investor may consider which of the following factors least important when choosing a mutual fund to invest in? A) Investment policies B) Size of the fund C) Investment objectives D) Fees

A) It isn't known Answer Explanation: The stop order will convert into a market order when any shares of Time Warner sell at $11. However, there is no guarantee of the next-sale price. It probably will be about $11 but it could be lower. This is a vulnerability of both market and stop orders. Textbook Reference: Please see textbook section 9.4.4

Cleo wants to make sure she gets a good price when she sells her 400 shares of Time Warner stock. If she enters a stop order to sell the shares at $11, what is the worst price she can get? A) It isn't known B) $10.99 C) $11 D) $10

C) a falling stock price. Answer Explanation: Stabilization allows the underwriter to bid on a new issue in the secondary market to prevent a decline in price. Textbook Reference: Please see textbook section 8.3.7

During the post-effective period for an IPO, the main concern that may cause underwriters to engage in stabilization is A) the issuer's need to receive more proceeds from the deal. B) a rising stock price. C) a falling stock price. D) not enough shares available to meet demand.

D) prepayment risk.

Falling interest rates can create additional risk for holders of mortgage-backed securities (MBS) because homeowners can refinance into lower-rate mortgages. This risk is called A) capital risk. B) credit risk. C) mortgage acceleration risk. D) prepayment risk.

C) On the filing date The filing date is when the issuer or lead underwriter delivers the registration to the SEC. The minimum cooling-off period is 20 days. Textbook Reference: Please see textbook section 8.1.2

For a public offering of securities, when does the cooling-off period begin? A) On the effective date B) 20 days after the effective date C) On the filing date D) 20 days after the filing date

C) Negotiable Answer Explanation: Negotiable CDs, which generally are sold to institutions in large denominations, often have multi-year maturities and are priced like bonds on secondary markets. Prices rise when interest rates decline and fall when interest rates increase. But they always pay face value at maturity date. Textbook Reference: Please see textbook section 3.6.2.2

For which type of certificate of deposit (CD) do resale prices rise and fall with changes in interest rates? A) Callable B) Breakable C) Negotiable D) Jumbo

C) ETF Answer Explanation: An exchange traded fund (ETF) is an investment company product that will typically have lower expenses than a traditional mutual fund, and may be purchased and sold throughout the trading day. Textbook Reference: Please see textbook section 4.5.2

Gail is seeking an investment company product with low operating expenses that she can trade any time during the day. You might suggest that she consider a (an) A) CMO B) DPP C) ETF D) Variable annuity

A) 1200 Answer Explanation: Security holders are prohibited from tendering more shares in a tender offer than they hold net long. In this case, the holder is net long 1,200 shares (2,000 long - 800 short.) Textbook Reference: Please see textbook section 8.2.6.1

Grace owns 2,000 shares of ABC Corporation common stock long and she is short 800 shares of the same stock. She holds no "equivalent securities." What is the maximum number of shares she can tender, in response to a tender offer? A) 1200 B) 2000 C) None D) 800

B) One

How many market makers, at minimum, are required for a security to be quoted on the OTCBB? A) Three B) One C) Four D) Two

C) Investors must receive an official statement no later than the settlement of the transaction When municipal securities firms market LGIP securities, they are required to provide an official statement for disclosure no later than the settlement date. This statement is often called an Information Statement, but delivery is not required until the settlement date, not the trade date. The prospectus delivery requirement applies to corporate securities. Textbook Reference: Please see textbook section 5.6.1.3

If a municipal securities firm markets LGIP securities to potential customers, which of the following statements is TRUE? A) There is no specific disclosure document required because purchasers of these securities are institutional and sophisticated investors B) Investors must receive a prospectus no later than the settlement of the transaction C) Investors must receive an official statement no later than the settlement of the transaction D) Investors must receive an Information Statement no later than the date the trade is made

D) All of the above cases and for all types of securities Answer Explanation: The fraud provisions of the act of 1934 apply to all persons and for all types of securities. No person or transaction is ever exempt from the antifraud provisions of the Securities Act of 1934. Textbook Reference: See textbook section 9.1

The fraud provisions of the Securities Exchange Act of 1934 apply to which of the following? A) Manipulation of the price of a municipal security B) Participation in an all-or-none offering and reporting the offering as firm to the client C) Short sale of municipal security serial bonds D) All of the above cases and for all types of securities

D) $1,000.00 Answer Explanation: Most corporate bonds have a par value of $1,000. For exam purposes, assume a par value of $1,000 for bonds. Textbook Reference: Please see textbook section 2.1.2

The most common par value for corporate bonds is A) $500.00 B) $10,000.00 C) $50,000.00 D) $1,000.00

A) There will be no change in nominal yield. Answer Explanation: Nominal yield is the bonds annual interest or coupon rate. It is a percentage of par value and fixed over the life of the bond. Textbook Reference: Please see textbook section 2.2.1

When a bond's market price increases, what is the impact on its nominal yield? A) There will be no change in nominal yield. B) Nominal yield will increase. C) There will be increased volatility in the nominal yield. D) Nominal yield will decline.

A) credit ratings of the two bonds Answer Explanation: The credit ratings of the bonds would be the most important factor to examine when comparing the liquidity differences of two corporate bonds. Textbook Reference: Please see textbook section 3.1.5

When comparing liquidity differences between two corporate bonds, the most important factor to be considered is the A) credit ratings of the two bonds B) maturity of the two bonds C) coupons of the two bonds D) CUSIP number

C) During the cooling-off period Answer Explanation: The cooling-off period begins once the issuer files the registration statement with the SEC. During the cooling-off period, the underwriters can market the securities to investors, including via road shows. Textbook Reference: Please see textbook section 8.1.4

When does the road show take place? A) During the pre-registration period B) During the active solicitation period C) During the cooling-off period D) During the post-effective period

A) Bonds with lower coupons and longer maturities Answer Explanation: Bonds having lower coupons and longer maturities will most be impacted by interest rate changes. Textbook Reference: Please see textbook section 2.3.1

When interest rates change, which of the following bonds will be impacted the most? A) Bonds with lower coupons and longer maturities B) Bonds with higher coupons and shorter maturities C) Bonds with higher coupons and longer maturities D) Bonds with lower coupons and shorter maturities

B) Whether or not the issuer reports financial information to the SEC Answer Explanation: Companies that report financial information to the SEC are considered public companies. Securities acquired through private placements are restricted or control securities. If these securities are issued by a public company the minimum holding period until resale is six months. Otherwise, it is 12 months. Textbook Reference: Please see textbook section 8.2.4.1

When securities are purchased by investors in a Regulation D private placement, what determines the required holding period, before they can be sold? A) The size of the issuer B) Whether or not the issuer reports financial information to the SEC C) The size of the private placement D) Whether or not the offering is an IPO

C) It is a measure of how much a bond's price will change when interest rates fluctuate. Answer Explanation: Duration is a commonly used method of gauging a bond's sensitivity to changing interest rates. Textbook Reference: Please see textbook section 2.3.1

Which of the following best describes duration? A) It is the length of time between call dates or interest payment dates on a bond. B) It is a measure of how the Treasury yield curve will adjust when general interest rates change. C) It is a measure of how much a bond's price will change when interest rates fluctuate. D) It is the length of time that a bond remains outstanding prior to it being called or redeemed by the issuer.

B) 0.0009 Answer Explanation: It is important to note that this answer is as a pecentage. One basis point is equal to .01%, or .0001. There are 100 basis points in 1%. To convert basis points to a percentage, move the decimal two places to the left. To convert basis points to a decimal, move the decimal point four places to the left. So, 9 basis points becomes .09%, or 0.0009. Textbook Reference: Please see textbook section 2.1.7

Which of the following is equal to 9 basis points? A) 0.009 B) 0.0009 C) 0.000009 D) 0.0000009

D) The Official Statement Answer Explanation: The Official Statement contains the most complete financial information about the issuer, and a detailed description of the municipal issue. Textbook Reference: Please see textbook section 8.4.3

Which of the following is the best source of financial information about an issuer for potential investors? A) The underwriting agreement B) The Official Notice of Sale C) The legal opinion D) The Official Statement

A) commission received Answer Explanation: In an agency transaction, the commission paid by the customer to the broker-dealer must be disclosed. In a principal transaction, it is the difference between the price charged to the customer and the prevailing market price charged by a market maker who works in an active and competitive market Textbook Reference: Please see textbook section 9.2.1.2

In an agency transaction for a penny stock, the amount of compensation disclosed is the A) commission received B) difference between price charged and the average of two or more market maker's prices C) difference between price charged and prevailing market price D) rebate paid by the issuer

A) Risk-sharing Answer Explanation: Syndication helps to spread the risk of an offering among all investment banks participating in the syndicate. This is especially important in firmcommitment offerings, in which investment bankers bear the risk for any unsold securities. Textbook Reference: Please see textbook section 8.3.3

In firm-commitment public securities offerings, what is the main advantage of the syndication process to investment bankers? A) Risk-sharing B) Regulatory compliance C) Increased profit D) Ability to sell securities across state lines

A) Coincident Answer Explanation: Manufacturing sales is a coincident indicator. Coincident indicators provide a snapshot of the economy's current level of health. Textbook Reference: Please see textbook section 10.1.4.3

Manufacturing sales is what kind of economic indicator? A) Coincident B) Lagging C) Leading D) Coterminous

B) Refunding Answer Explanation: A refunding is a refinancing strategy that an issuer might utilize when interest rates have declined following the issuance of a bond. The issuer would sell a new bond at the new lower rates and use the proceeds of the sale to redeem the outstanding bonds which are carrying a higher interest rate. The end result is lower financing costs for the issuer. Textbook Reference: Please see textbook section 2.1.9

Market interest rates have declined since ABC Co. issued a $100,000,000 debenture. To benefit from the change in interest rates, ABC might consider a A) Leveraged buy out B) Refunding C) Reorganization D) Repurchase agreement

C) their units trade actively on stock exchanges. Answer Explanation: MLPs have a limited partnership structure but their units trade actively on stock exchanges. They help investors participate in several industries including oil and gas drilling, energy distribution and storage, and shipping facilities. Textbook Reference: Please see textbook section 5.2.6

Master Limited Partnerships (MLPs) have a limited partnership structure. But unlike other limited partnerships A) their distributions are not taxable. B) they have superior tax advantages. C) their units trade actively on stock exchanges. D) they have no general partner.

A) Interest income potentially taxable at the state level but not the federal level Answer Explanation: Most municipal bonds pay interest that is exempt from federal income taxes, but may be taxable at the state level, depending on the state of residence of the investor, and from what state the bond is issued from. Textbook Reference: Please see textbook section 3.4.5

Municipal bonds offer investors A) Interest income potentially taxable at the state level but not the federal level B) Triple tax free income for all investors C) Higher returns than most corporate bonds, owing to their fully taxable interest income D) Interest income taxable at the federal level but not the state level

A) their potential lack of liquidity. Answer Explanation: Penny stocks, or stocks priced below $5 per share that do not trade on an exchange, are frequently thinly traded, which means that there may be no market for the stock if customers want to liquidate their positions. Because of this market risk additional disclosure must be made to all buyers of penny stock. Textbook Reference: Please see textbook section 1.2.2

Penny stocks present added risk to customers because of A) their potential lack of liquidity. B) their high surrender charges. C) their low potential for return. D) their potential for exposure to adverse tax consequences.

D) II only Answer Explanation: Preferred stock pays dividends if declared by the Board of Directors. Preferred stock generally does not have voting rights. While it has priority over common stock in the event of a corporate liquidation, it does not have priority over corporate debt, including debentures. Textbook Reference: Please see textbook section 1.5.1

Preferred stock includes which of the following features? I. Voting rights II. Dividends if declared by the Board of Directors III. Priority over debentures in a corporate liquidation A) III only B) I, II and III C) I only D) II only

D) the registrar. Answer Explanation: The registrar maintains records of ownership by matching each share of stock against an ownership record. The registrar also makes sure there is no unauthorized stock issuance. Textbook Reference: Please see textbook section 1.6.1

Public corporations must make sure that their stock ownership records are accurate by matching each share of stock with an owner. This task is performed by A) the bank of record. B) the transfer agent. C) the corporate secretary. D) the registrar.

C) The Securities Act of 1933 Answer Explanation: The Securities Act of 1933 includes anti-fraud and anti-manipulation rules that apply to primary market transactions. Neither exempt nor nonexempt securities are excluded from the anti-fraud provisions of the Acts of 1933 or 1934.

Rules against anti-manipulation in the primary market sale of exempt securities are addressed in A) The Investment Company Act of 1940 B) The Glass Steagall Act C) The Securities Act of 1933 D) The Securities Exchange Act of 1934

B) restricted securities Answer Explanation: Under Rule 144, shares acquired via a private transaction directly from the spouse of an affiliate are considered restricted securities if the spouse shares the same home as the affiliate. Textbook Reference: Please see textbook section 8.2.4.1

Shares acquired from the spouse of an affiliate in a private placement would be considered A) an illegal transfer B) restricted securities C) immediately saleable D) non-affiliated securities Answer Explanation: Under Rule 144, shares acquired via a private transaction directly from the spouse of an affiliate are considered restricted securities if the spouse shares the same home as the affiliate. Textbook Reference: Please see textbook section 8.2.4.1

A) on the ex-dividend date

The NAV of a mutual fund share will decrease by the amount of the dividend A) on the ex-dividend date. B) on the payable date. C) when announced by the board of directors of the fund. D) at the start of trading on the morning the dividend is announced.

B) MBS investors must reinvest principal in a lower interest rate environment. Answer Explanation: Homeowners tend to refinance (pay down) their mortgages in falling rate environments. This increases prepayment risk as principal is returned to MBS investors faster than expected. This principal must be reinvested in a lower-rate environment. Textbook Reference: Please see textbook section 7.2.7

The downside of increased prepayment risk in mortgage-backed securities (MBS) is that A) MBS investors lose principal. B) MBS investors must reinvest principal in a lower interest rate environment. C) MBS investors lose liquidity. D) MBS securities have their credit ratings downgraded.

B) They act as agents on the deal. Answer Explanation: Selling group members are additional securities firms that act as agents, assisting in selling the new issue. Unlike other syndicate members, the selling group has no liability for any unsold securities. Therefore, because the selling group takes on no risk they are compensated least in the syndicate. The most they can earn is the selling concession for each bond that they sell. Textbook Reference: Please see textbook section 8.3.4.2

Which of the following is true about the selling group? A) They have liability for unsold securities. B) They act as agents on the deal. C) The compensation they receive is known as the total takedown. D) They receive the greatest compensation in the syndicate.

D) The right of the firm to make a profit Other pricing factors, beyond the 5% policy, should be considered, including the security price and availability and dollar size of the transaction. The broker-dealer's profitability or profit targets may not be used as a pricing factor when trading in an agency capacity. Textbook Reference: Please see textbook section 9.2.1.4

Which of the following may not be used as a factor in determining a fair price when a broker dealer is trading in an agency capacity? A) Dollar size of the transaction B) Price of the security C) Security availability D) The right of the firm to make a profit

C) I, II and III The OTC market is a decentralized market connecting to broker-dealers electronically. It is a negotiated market place where various market makers enter bids and asks and facilitates the trading of stock not listed on an exchange. Textbook Reference: Please see textbook section 9.3.4.1

Which of the following statements are true regarding the OTC market? I. It facilitates the trading of stock not listed on an exchange II. It is a connection of broker-dealers via computers III. There can be more than one market maker in a security A) I and III only B) I and II only C) I, II and III D) II and III only

B) An order in which all members of the syndicate share in the profit according to their participation There are four types of orders that can be placed with a syndicate. A group order is for the benefit of all members of the syndicate, and proceeds are shared equally among all members of the syndicate. Presale orders are entered before the syndicate wins the bid. Designated orders are usually entered by institutions that identify a member or members of the syndicate to receive the credits. Member orders are placed by a single firm for its own inventory or to fill orders of its customers. Textbook Reference: Please see textbook section 8.4.1.1

Which of the following statements describes a group net order for a new issue of municipal securities? A) An order placed by a member firm for its customers B) An order in which all members of the syndicate share in the profit according to their participation C) An order placed before the syndicate actually purchases the issue from the issuer D) An order from a large institution in which designates two or more members to receive credit for the sale

C) They have a minimum purchase amount of $100 Answer Explanation: $100 is the minimum purchase amount for U.S. Treasury Notes, which are medium term Treasury securities. They mature in the range of two to ten years, and yield a steady stream of interest payments, payable every 6 months. They are generally issued at par and trade actively in the overthe- counter market.

Which of the following statements is true of Treasury Notes? A) They are the shortest maturity of U.S. government securities B) They cannot be traded in the secondary market C) They have a minimum purchase amount of $100 D) They are issued at a discount and mature to face value

B) Common stock Answer Explanation: In a corporate default, preferred stock holders usually have a priority claim over common stock holders. However, preferred dividends are not guaranteed, and the claims of preferred stock holders may fall below all debt holders of the issuer. Textbook Reference: Please see textbook section 3.1.2.3

Which of the following types of securities does preferred stock outrank, in the corporate capital structure? A) Junior debt B) Common stock C) Mezzanine debt D) Senior secured debt

D) I and IV Answer Explanation: The homebuilding and steel sectors are deeply cyclical, meaning their companies' revenue and earnings are subject to high volatility depending on where they are in the cycle. Consumer products and healthcare services companies tend to be much more stable and less cyclical due to the nature of their end markets. Textbook Reference: Please see textbook section 10.2.5.1

Which two of the following are considered deep cyclical sectors? I. Homebuilding II. Consumer product III.Healthcare services IV. Steel A) II and IV B) I and III C) II and III D) I and IV

A) I and IV Answer Explanation: Treasury bills are unique from notes and bonds because they are purchased at a discount from their face value. The interest is the difference between the price paid to purchase the bill and the face amount received at maturity. Treasury notes and bonds typically pay interest semi-annually. Textbook Reference: Please see textbook section 3.2.3

Which two of the following statements are true regarding quotations of government securities? I. Treasury bills are quoted at a discount from their face value II. Treasury notes and bonds are quoted at a discount from their face value III. Treasury bills typically pay interest every 6 months IV. Treasury notes and bonds typically pay interest every 6 months. A) I and IV B) II and IV C) I and III D) II and III

A) I and III Closed-end funds are actually considered a type of ETF by some. These are both classified as closed-end investment companies because they have a stable pool of capital that is raised through their initial public offering. Textbook Reference: Please see textbook section 4.6

Which two statements correctly compare ETFs and closed-end funds? I. Both are investment company products II. Closed-end funds are investment company products; ETFs are not III. Both have a stable pool of capital IV. Closed-end funds have a stable pool of capital; ETFs offer shares continuously A) I and III B) I and IV C) II and III D) II and IV

A) No-load No-load funds are sold at net asset value. That means that the fund does not charge a sales charge above the net asset value and investors can purchase shares at the NAV Textbook Reference: Please see textbook section 4.2.5.3

Which type of mutual fund is sold at net asset value? A) No-load B) Open-end C) Front-end load D) Closed-end

C) may be called any time after 12 years Answer Explanation: This bond may be called any time after year 12. Textbook Reference: Please see textbook section 2.1.9

XYZ Corporation issued a 25-year bond, callable after 12 years. This means that the bond A) must be called in year 12. B) may be called in year 12 or 25. C) may be called any time after 12 years D) must be called after 12 years.

A) above 5.4%. Answer Explanation: For a discount bond (trading below par value), a bond's yield to maturity (YTM) will always be greater than current yield. Textbook Reference: Please see textbook section 2.2.3

A bond with a 5.1% coupon is trading at $942. It has a current yield of 5.4%. The bond's yield to maturity is A) above 5.4%. B) exactly 5.4%. C) between 5.1% and 5.4%. D) below 5.1%.

B) Financial advisor Answer Explanation: A broker, dealer, or municipal securities dealer that enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities is defined by MSRB rules as a financial advisor. Textbook Reference: Please see textbook section 3.4

A broker, dealer, or municipal securities dealer that enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities is a(n) A) SMMP B) Financial advisor C) Underwriter D) Control person

C) II and III Answer Explanation: GO bonds are used to build facilities for the public like government buildings. Statutory power refers to passing a law that will authorize a local municipality to proceed with issuance of a general obligation bond. This usually requires a voter referendum, but not approval from the state legislature. Textbook Reference: Please see textbook section 3.4.1.1

A city passes a law that permits it to issue new municipal bonds to fund a new city government building. Which two of the following statements are TRUE? I. This is a revenue bond issue II. This is a general obligation bond issue III. The issuer used statutory power to authorize this bond issue IV. The issuer cannot proceed with this issue until it receives approval from the state legislature A) I and IV B) II and IV C) II and III D) I and III

Answer Explanation: Stock splits and reverse splits don't change the total value of investors' holdings. For example, if the investor owned 800 shares at $1 per share before the 1-for-10 reverse split, he/she will own 80 shares at about $10 per share after the event. Textbook Reference: Please see textbook section 1.7.4

A company "reverse splits" its stock on a 1-for-10 basis. If an investor holds 800 shares before the event, what will be the impact of the split, if any, on the total value of the investors' shares? A) Total value will decline by 90% B) Total value will decline by 10% C) Total value will increase by 10 times D) Total value will not change

B) Share repurchase program Answer Explanation: A company that believes its stock is undervalued may decide to buy their own shares in the open market. Textbook Reference: Please see textbook section 9.3.1

A company that believes its stock is undervalued might take which of the following actions? A) Follow-on offering B) Share repurchase program C) Forward stock split D) Leveraged buy-out

C) Units in a fixed portfolio of securities Answer Explanation: Customers who invest in unit investment trusts own units in a fixed portfolio of securities. This is considered an advantage to some investors because they know the securities held by the trust for the life of their investment. Textbook Reference: Please see textbook section 4.4.1.1

A customer that invests in a unit investment trust owns A) Units in a portfolio of securities that is actively managed B) Shares in a fixed portfolio of securities C) Units in a fixed portfolio of securities D) Shares in a portfolio of securities that is actively managed

C) A closed-end fund Answer Explanation: It is not unlikely for shares of closed end funds to trade at prices of 10 20% above or below NAV. Textbook Reference: Please see textbook section 4.5.1.2

A discount of more than 10% below its NAV is most likely found in shares of which of the following? A) An equity mutual fund B) An ETF C) A closed-end fund D) A bond mutual fund

C) File timely periodic reports with the SEC

A failing company becomes delisted by Nasdaq and goes to the OTCBB. What must it do, at minimum, to remain eligible for quotes on the OTCBB? A) Maintain sufficient trading volume B) Amend its by-laws C) File timely periodic reports with the SEC D) Have at least three market makers Answer Explanation: The SEC believes that the investing public needs adequate disclosure about companies that trade in public markets, such as the OTCBB. Timely periodic filings (10K, 10Q, etc.) are one way that issuers can meet this requirement. Textbook Reference: Please see textbook section 9.3.4.1

D) GO bonds with long-term maturities Answer Explanation: Because interest rates are on the rise, the financial advisor will most likely recommend locking in the lowest possible rate for the long-term. Therefore, it is likely to recommend long-term bonds to finance the project. GO bonds are used to finance public projects like government buildings. Textbook Reference: Please see textbook section 3.4.4.1

A municipality is planning to raise money to finance a large government building complex. It hires a financial advisor to provide assistance in planning the new issue. If the advisor believes that interest rates may soon trend higher, the advisor would most likely recommend which one of the following? A) Revenue bonds with medium-term maturities B) TANs C) BANs D) GO bonds with long-term maturities

C) the stockholder must surrender the preferred when called or lose the right to par value Answer Explanation: The advantage of convertible preferred stock is the opportunity to participate in any appreciation in the value of the common stock. In return for this potential benefit, the preferred pays a lower rate than nonconvertible preferred. Stockholders are always required to surrender the stock when it is called, but they will usually be paid a premium over par value. Additionally, dividends cease on the call date. Note that this is an "except" question. Textbook Reference: See textbook section 1.5.2

All of the following statements are true of a callable convertible preferred issue EXCEPT that A) the convertible preferred can increase in price because of the underlying security B) the convertible is issued with a lower stated dividend rate than a nonconvertible preferred C) the stockholder must surrender the preferred when called or lose the right to par value D) dividend payments stop after the preferred is called

C) A reduction in vacancy rates Answer Explanation: A reduction in vacancy rates means that there is a lower supply of available buildings. When the supply is reduced, there is greater demand, which drives the price up. A reduction in vacancy rates would be likely to cause the share of a REIT to trade at a premium. Declining demand for space, declining property values, and decreasing demand for REIT shares would all be likely to cause REIT shares to trade at a discount. Textbook Reference: Please see textbook section 5.1.2

All of the following would likely cause a share of a REIT to trade at a discount EXCEPT A) A decrease in demand for new space B) A decline in property values C) A reduction in vacancy rates D) A decrease in the demand for the shares of the REIT

C) Is not listed on a national securities exchange in the U.S Answer Explanation: The main requirements for ADRs to be quoted on the OTCBB are SEC registration and no listing on a national U.S. exchange. However, if the ADR is listed on a national exchange but does not qualify for dissemination of transaction reports on the Consolidated Tape, it still may be quoted. Textbook Reference: Please see textbook section 9.3.4.1

An American Depository Receipt (ADR) may be quoted on the OTCBB if it is registered with the SEC and A) Does not exceed a maximum public share float B) Does not exceed a maximum average daily trading volume C) Is not listed on a national securities exchange in the U.S. D) Is not listed on a major securities exchange in the U.S. or abroad

D) business risk. Answer Explanation: Non-systematic risk or business risk is the risk inherent in individual stocks or companies. Changes in corporate management or product recalls, which could impact a single stock, are examples. Textbook Reference: Please see textbook section 7.2.12

An airline is involved in a scandal of covering up defects that caused its planes to crash. As a result, the stock price plummets. This is an example of A) political risk. B) systematic risk. C) outlier risk. D) business risk.

C) equity owner in the business. Answer Explanation: An individual having a financial interest in a limited partnership is considered to have an equity interest in the business. Textbook Reference: Please see textbook section 5.2.1

An individual has made an investment in a limited partnership. This individual is deemed to be a(n) A) secured creditor in the business. B) senior subordinated lender to the business. C) equity owner in the business. D) junior subordinated lender to the business.

A) Zero coupon bond Answer Explanation: Of these choices, a zero coupon bond can assure that a fixed amount of money is available at a particular time. Zero coupon bonds are purchased at a deep discount and mature to their face amount. They are well suited for planning for long-range goals, such as a child's education. Though a treasury bond is also a safe investment, the investor does not need the semi-annual coupon that it offers. Textbook Reference: Please see textbook section 2.1.5

An investor wishes to establish a college education fund for his son who is 3 years old. He is interested in ensuring that $100,000 will be available when the child reaches age 18. An instrument that may be well suited to meeting these objectives is (a) A) Zero coupon bond B) Treasury Bond C) AAA corporate bond D) Blue chip common stock Answer Explanation: Of these choices, a zero coupon bond can assure that a fixed amount of money is available at a particular time. Zero coupon bonds are purchased at a deep discount and mature to their face amount. They are well suited for planning for long-range goals, such as a child's education. Though a treasury bond is also a safe investment, the investor does not need the semi-annual coupon that it offers.

A) may sell securities only to residents of that state Answer Explanation: Rule 147 permits intrastate issuers to sell securities without registration with the SEC to residents of that state. The securities must be held for 6 months before they can be sold to non-state residents. Textbook Reference: Please see textbook section 8.2.2

An issuer intending to distribute securities under Rule 147 A) may sell securities only to residents of that state B) must file an offering notice with FINRA no later than 2 business days prior to distribution C) must deliver a prospectus to investors for disclosure D) can sell no more than $5 million without a full registration statement

A) a high coupon and no call premium when interest rates are falling Answer Explanation: Issuers strive to keep their cost of borrowing as low as possible. To do this, they call bonds with high coupons when rates are have fallen. They can then issue new bonds at a lower rate and reduce borrowing costs. A call premium is an additional amount that must be paid to call the bonds. To keep costs as low as possible, the issuer would prefer to call a bond with no call premium. Textbook Reference: Please see textbook section 2.1.9

An issuer is most likely to call a bond which has A) a high coupon and no call premium when interest rates are falling B) a low coupon and a call premium when interest rates are rising C) a low coupon and no call premium when interest rates are rising D) a high coupon and a call premium when interest rates are falling

A) at which the market maker or broker-dealer is willing to buy or sell. Answer Explanation: Any quote must be entered at prices at which the market maker or brokerdealer is willing to buy or sell. Textbook Reference: Please see textbook section 9.3.3

Any quotes entered by a market maker or broker-dealer must represent prices A) at which the market maker or broker-dealer is willing to buy or sell. B) that are competitive with the current market. C) that are not more than 10% away from the NBBO. D) at which a prudent person would be willing to buy or sell.

B) II, I, IV, III

Arrange the steps that are followed in the liquidation of a limited partnership from first to last. I. General creditors are paid II. Secured claims are paid III. General partners receive their share of profits and contributed capital IV. Limited partners receive their share of profits and contributed capital A) I, II, III, IV B) II, I, IV, III C) IV, III, II, I D) II, I, III, IV

B) Decreases Answer Explanation: As the market interest rate increases, a bond's price decreases because newly issued bonds pay a more attractive yield. Textbook Reference: Please see textbook section 2.3.1

As interest rates increase, a bond's price does which of the following? A) Remains neutral B) Decreases C) Defaults D) Increases

A) outstanding shares will decrease. Answer Explanation: Treasury stock represents shares that have been repurchased by the company. As the number of Treasury shares increase, outstanding shares will decline. Textbook Reference: Please see textbook section 1.1

As the number of Treasury shares increase, the company's A) outstanding shares will decrease. B) profits will increase. C) revenues will tend to fall. D) outstanding shares will increase.

B) 1030 Answer Explanation: At maturity, a corporate bondholder will receive the face amount, or par value of the bond ($1000), plus the remaining semi-annual interest payment. A bond with a coupon of 6% pays $60 of interest per year, or $30 semi-annually. $1000 + $30 = $1030. Textbook Reference: Please see textbook section 2.1.4

At maturity, an investor who holds a 6% bond issued by ABC Corporation will receive A) 1060 B) 1030 C) 103 D) 106 Answer Explanation: At maturity, a corporate bondholder will receive the face amount, or par value of the bond ($1000), plus the remaining semi-annual interest payment. A bond with a coupon of 6% pays $60 of interest per year, or $30 semi-annually. $1000 + $30 = $1030. Textbook Reference: Please see textbook section 2.1.4

D) dividends are typically paid as a percentage of par value. Answer Explanation: The main attraction of preferred stock is steady dividends, which are quoted as a percentage of par value. Par value does not, however, indicate the market value of shares. Textbook Reference: Please see textbook section 1.5.3

The par value of preferred stock is important to know as A) the shares may be sold on the open market at par value. B) par value represents the net asset value of the shares for redemption purposes. C) the interest rate is quoted at a spread to par value. D) dividends are typically paid as a percentage of par value.

C) Blue chip common stock Answer Explanation: Money market funds are comprised of short-term, safe and liquid debt securities. Equity securities are not included in these portfolios. Longterm debt securities like T-bond are included if they mature within one year. Textbook Reference: Please see textbook section 3.6

The portfolio of a money market fund is likely to contain all of the following EXCEPT A) T - bills B) Repurchase agreements C) Blue chip common stock D) T-bonds that mature within one year

A) Public offering price Answer Explanation: Mutual fund shares are sold to the public at the POP (public offering price). The sales charge is added to the net asset value to arrive at the POP. Textbook Reference: Please see textbook section 4.2.5.1

The price at which a fund sponsor sells mutual fund shares to the public is the A) Public offering price B) Net asset value plus commission C) Net asset value D) Public offering price plus commission

D) A Capital gain

The sale of an asset at a price higher than its purchase price is A) Capital appreciation B) A Capital sale C) A Capital loss D) A Capital gain

D) Issued stock Answer Explanation: Issued stock are the authorized shares of a corporation that have been sold to the public. Textbook Reference: Please see textbook section 1.1

The shares of authorized stock that are sold to the public are known as A) Redeemed shares B) Treasury stock C) Preferred stock D) Issued stock

C) They qualify as accredited investors on the basis of their net worth Answer Explanation: Regulation D defines "accredited investors" as individuals with a net worth of at least $1 million at the time of purchase; or individuals with single income of more than $200,000 or joint income (with a spouse) of more than $300,000, in each of the two most recent years. The individual may meet either the asset or income test. In this case, the asset test is met, but not the income test. Textbook Reference: Please see textbook section 8.2.3

Tom and Betty are a married couple with combined net worth $1.2 million in and $200,000 in steady annual income. They want to invest in a private limited partnership. Which of the following is TRUE about their status, under the SEC's Regulation D? A) They may qualify as accredited investors individually, but not as a couple. B) They do not qualify as accredited investors C) They qualify as accredited investors on the basis of their net worth D) They qualify as accredited investors on the basis of their income

D) I and IV Answer Explanation: When the Federal Open Markets Committee (FOMC) purchases U.S. Treasury securities, the money supply increases. Because of an increase in the supply of money, interest rates will decline. Textbook Reference: Please see textbook section 10.3.3.2

U.S. Treasury Securities are purchased by the Federal Reserve Board. The result of this transaction is that I. Money supply will increase II. Money supply will decrease III. Interest rates will rise IV. Interest rates will fall A) II and III B) II and IV C) I and III D) I and IV

D) the fact that the firm is entitled to a profit Answer Explanation: Commissions charged in agency transactions must be fair and reasonable. In determining fair and reasonable commissions a firm may consider market conditions with respect to such security at the time of the transaction, the expense of executing the order and the value of any service rendered by reason of the firm's experience in and knowledge of such security and the market therefor. When executing trades in an agency basis, however, the commission does not contemplate the fact that the firm is entitled to a profit. Textbook Reference: Please see textbook section 9.2.1.4

Under FINRA's Standards of Commercial Honor and Principles of Trade all of the following may be considered by a firm when charging a commission in an agency transaction, except: A) market conditions with respect to such security at the time of the transaction B) the value of any service rendered by reason of the firm's experience C) the expense of executing the order D) the fact that the firm is entitled to a profit

A) It is executed immediately at the best price available Answer Explanation: When the stop price is reached, a stop order converts into a market order. It is immediately filled in full at the best available price(s). Textbook Reference: Please see textbook section 9.4.4

What happens to a stop order when the order price is reached? A) It is executed immediately at the best price available B) It becomes a limit order at that price C) It is executed immediately at that same price D) It is executed within 10 minutes at the best price available Answer Explanation: When the stop price is reached, a stop order converts into a market order. It is immediately filled in full at the best available price(s). Textbook Reference: Please see textbook section 9.4.4

B) 9% Answer Explanation: Nominal yield, AKA the coupon, is calculated as the sum of annual coupon (interest) payments divided by the face amount of the bond. Two coupons of $45 each = $90; $90 divided by $1,000 face value = 9%. The current yield is calculated using the market price of the bond. The current yield for this bond is 10% ($90/$900). Textbook Reference: Please see textbook section 2.2.1

What is the nominal yield on a bond that is trading for $900, with a face value of $1,000, and pays two coupons per year of $45 each? A) 4.5% B) 9% C) 10% D) 6%

C) Red herring Answer Explanation: The preliminary prospectus, also known as a red herring, may be delivered to potential purchasers of the offering during the cooling-off period. Indications of interest may be taken, but no sales may be made until the effective date. Textbook Reference: Please see textbook section 8.1.2

What type of prospectus may investment bankers use to inform brokers and investors during the cooling-off period, while public offerings are awaiting clearance by the SEC? A) Greenmail B) Green shoe C) Red herring D) White knight