EXAM 1
A company has announced a tender offer for its shares at $50. The issuer wants to purchase a minimum of 100,000 shares, up to a maximum of 1,000,000 shares. If 80,000 shares are tendered, how much will an investor receive if he has tendered 1,000 shares? $0 $50,000 $40,000 $4,000
$0 Since the tender offer has a minimum of 100,000 shares and only 80,000 shares have been tendered by investors (i.e., put up for sale), the company will not buy any shares. If the tender had crossed over the minimum of 100,000, then the investor would have tendered all of his shares and received $50,000. If the tender had gone over the maximum, the investor's tender would be filled on a pro-rata basis. (17557)
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be: $1,051.25 $1,052.40 $1,054.00 $1,057.50
$1,057.50 U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price: Step 1: 105.24 is equal to 105 24/32 Step 2: convert 24/32 into a decimal, which is .75 Step 3: convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay $1,057.50.
A company wants to buy back some of its shares from existing shareholders through a tender offer. The company offers to buy up to a maximum of 5 million shares at $15 per share, but sets no minimum number of shares to purchase. A shareholder wants to sell 3,000 shares. If 4.9 million shares have been tendered, how many of the investor's shares will the company buy? 45,000 0 2,940 3,000
3,000 Since there's no minimum set on the tender offer and the company hasn't reached the maximum of 5 million shares, the company will buy all 3,000 shares from the investor. If the tender had a minimum threshold and the minimum had not yet been reached, the company would not buy any of the investor's shares (i.e., 0 shares). If the tender was oversubscribed (i.e., shareholders wanted to sell more than 5 million), then the investor would've been able to sell a pro rata or proportionate number of her shares back to the company.
The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is: 4.15% 4.26% 4.46% 4.50%
4.26% The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.
An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is: 5.30% More than 5.30% Between 5.30% and 5.75% 5.75%
5.30% The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond's yield will be the same as the coupon rate, which is 5.30%.
A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield? 7.0% 7.5% 8.0% 8.3%
8.3% To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. The yearly interest is $80. The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%). The fact that these are convertible bonds is not relevant. (72667)
What's a general obligation (GO) bond? A bond that's backed by the taxes of the U.S. government A bond that's backed by the revenues of a local corporation A bond that's backed by the revenues of a project which is operated by a local municipality A bond that's backed by taxes imposed by a local municipality
A bond that's backed by taxes imposed by a local municipality A general obligation (GO) bond is a type of municipal bond. On a GO bond, the debt service (i.e., interest and principal payments) are paid for by taxes imposed by a municipality. On the other hand, revenue bonds are backed by the revenue of a municipal project or facility. Corporate bonds are backed by a corporation. Treasury bonds are backed by the full faith and credit as well as the taxing authority of the U.S. federal government. (17418)
Which of the following statements is TRUE concerning periodic payment variable annuities? A client's number of annuity units never changes A client's number of accumulation units never changes Annuity contracts never have a beneficiary The monthly payout is fixed by the inflation index
A client's number of annuity units never changes During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.
Jamie has inherited 500 shares of an investment company. She calls her broker to redeem the shares and is informed that the kind of investment company she owns makes no provision for future purchases or redemptions. What kind of investment company does she own? An open-end fund A closed-end fund A unit investment trust A face-amount certificate company
A closed-end fund A closed-end fund makes no provision for future purchases or redemptions from the issuing fund. Shares are bought and sold in the open market in the same manner as the common stock of corporations. All of the other types of funds listed do provide for future purchases to and redemptions from the fund.
Which of the following is the likely result of persistent deflation? A decrease in interest rates A decrease in the level of inflation A decrease in bond prices An increase in the value of equities
A decrease in interest rates Deflation is considered a reduction in the general level of prices. Deflation leads to lower interest rates, which results in higher bond prices. Equities tend to perform well during periods of inflation, not deflation. (37435)
All of the following persons are permitted to be named as a trusted contact person for a senior investor, EXCEPT: A family member A business associate A law firm A friend
A law firm To be a trusted contact person for a senior investor, the only requirements are that the person must be a natural person (not a law firm) and be at least 18 years old.
If a broker-dealer's trading desks purchases a large block of stock during the last minutes of trading in an effort to drive up the price, it is: An acceptable practice that's referred to as a block trade An acceptable practice that's referred to as trading ahead A prohibited practice that's referred to as backing away A prohibited practice that's referred to as marking-the-close
A prohibited practice that's referred to as marking-the-close The execution of a series of trades at or near the opening or closing of trading in an effort to influence the price of a security is a form of manipulation that's referred to as marking-the-opening or marking-the-close. Traders can execute customer orders or change the amount of securities they own to have securities available for customers; however, buying or selling the security to influence its price is considered manipulative.
If a temporary hold has been placed on an account, it will expire: AAfter two business days After 15 business days After 30 days After the firm completes its investigation of the account
After 15 business days If a temporary hold is placed on the account of a specified adult, it will expire by no later than 15 business days after the date that it was first placed on the account, unless it was otherwise terminated or extended by another authorized regulatory entity. The temporary hold may be extended by the firm for no longer than 10 business days following the date, unless it was otherwise terminated or extended by another authorized regulatory entity. (37540)
When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's: Market maker Principal Designated market maker Agent
Agent A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown.
A French company would like to have its stock traded in the U.S. securities markets. This would most likely be accomplished through the issuance of: Euro call options Global Depository Receipts Eurodollar bonds American Depositary Receipts
American Depositary Receipts American Depositary Receipts (ADRs) facilitate U.S. investment in foreign securities. The foreign securities are deposited in a branch of a U.S. bank located in that country. A receipt for those securities is then issued and traded in the U.S. as if it were the foreign security itself. A Global Depository Receipt (GDR) is incorrect because it trades in foreign markets, not in the U.S.
Which of the following may NOT occur during the waiting period of the securities registration process? The underwriter publishes a tombstone ad An underwriter sends a red herring to a potential customer An RR accepts a cash deposit for the offering from an interested customer An RR discusses the offering with a customer over the phone
An RR accepts a cash deposit for the offering from an interested customer During the waiting period (cooling-off-period), RRs may send customers the preliminary prospectus (red herring), discuss the issue with them, and accept (nonbinding) indications of interest. However, no part of the purchase price can be accepted until on or after the effective date.
A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client? A managed closed-end fund An S&P 500 Index mutual fund An S&P 500 Index exchange-traded fund An DJIA exchange-traded fund
An S&P 500 Index mutual fund Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.
Which of the following is classified as a joint account? An account shared between two brothers. An account established under UGMA/UTMA. An account with third party trading authorization. A spousal IRA.
An account shared between two brothers. In a joint account, all participants are considered part owners of the account. The custodian of a UGMA account manages the account, but the minor is the owner of the securities. Likewise, a person with third-party trading authorization can help manage the account, but is not an owner. All IRA accounts are individual accounts; there are no joint IRAs. A spousal IRA is owned by the spouse whose name is on the account. This is true even if the other spouse earned the income that was contributed to the account. (37406)
A husband and wife have combined earnings of greater than $300,000 in each of the last two years. If it's reasonably expected that this level of income will remain the same, the couple is considered: A qualified investor An accredited investor An institutional investor A qualified institutional buyer (QIB)
An accredited investor Accredited investors have a net worth of $1 million (excluding their primary residence) or annual income of $200,000 in each of the last two years. For married couples to be considered an accredited investor, they need to have income of at least $300,000. A qualified institutional buyer (QIB) must be institution with $100 million in assets under management (AUM), but is NOT a natural person. (17605)
Which of the following persons can a registered representative either make a loan to or borrow money from without providing notification to her employer? Another employee of an affiliated broker-dealer An institution that's in the business of borrowing or lending funds An individual with whom the RR maintains a personal relationship A company with which the RR has a business relationship
An institution that's in the business of borrowing or lending funds Registered representatives can borrow money from or loan money to a customer that regularly provides loans (e.g., a bank) without permission. However, for an RR to borrow from other employees, friends, and business partners, she's required to obtain permission from her employer. (17576)
The investments that tend to perform the WORST during periods of inflation are: Bonds Mutual funds ETFs Gold and silver
Bonds Bonds tend to perform the worst during periods of inflation since rising interest rates will result in falling bond prices and a decrease in the purchasing power of the interest payments. Mutual funds, ETFs, and gold and silver commodities tend to be good investments for a person seeking to offset inflation.
If a market maker has a current quote of 50.00 - 50.05 (15 x 20), this indicates that the firm is willing to: Sell 200 shares at $50.00 and buy 150 shares at $50.05 Buy 150 shares at $50.00 and sell 200 shares at $50.05 Sell 1,500 shares at $50.00 and buy 2,000 shares at $50.05 Buy 1,500 shares at $50.00 and sell 2,000 shares at $50.05
Buy 1,500 shares at $50.00 and sell 2,000 shares at $50.05 When reading a quote, the bid is always listed first (i.e., $50.00 in this question) and the offer/ask (i.e., $50.05 in this question) is listed second. The market maker willing to buy shares at $50.00 and sell them for $50.05. The numbers in parentheses or brackets refer to the number of shares represented by the bid and offer. Unless specified otherwise, it's assumed that the size is in round lots of 100 shares. Therefore, the market maker is willing to buy up to 1,500 (15 lots x 100 shares) at $50.00 and sell 2,000 (20 lots x 100 shares) at $50.05.
As it relates to the sale of variable contracts, which of the following is NOT considered non-cash compensation under FINRA rules? A gift A meal Commissions Lodging expenses
Commissions FINRA has specific rules for both "cash" and "non-cash" compensation when selling variable annuities and variable life insurance. According to FINRA, "cash" compensation includes discounts, concessions, fees, service fees, commissions, asset-based sales charges, loans, overrides, or cash benefits received. "Non-cash" compensation includes merchandise, gifts and prizes, as well as expenses for travel, meals, and lodging.
Which of the following choices would NOT be subject to the holding period restriction under Rule 144? Restricted stock acquired under an investment letter Restricted stock acquired under a stock option plan Control stock acquired under a private placement Control stock acquired through an open-market purchase
Control stock acquired through an open-market purchase There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period. (60357)
A stock that typically performs in parallel to the changes in the economy is referred to as a: Cyclical stock Defensive stock Growth stock Value stock
Cyclical stock The performance of a cyclical stock normally runs parallel to changes in the economy. Examples of cyclical stocks include machine tool companies, construction firms, as well as transportation and energy companies
The investments in a Coverdell Education Savings Account (CESA) are: Determined by the investor Determined by the firm through which it's opened Limited to AAA rated bonds Limited to mutual funds
Determined by the investor Investments in a CESA are self-directed, which allows investors to buy and sell virtually any and all types of securities. Conversely, Section 529 plans are not self-directed; instead, the investments are determined by the entity that manages the plan.
A firm is the managing underwriter of a follow-on offering of a security that's listed on the NYSE. The aftermarket prospectus delivery rule: Does not require the firm to deliver a prospectus Requires the firm to deliver a prospectus for 25 days Requires the firm to deliver a prospectus for 40 days Requires the firm to deliver a prospectus for 90 days
Does not require the firm to deliver a prospectus If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there's no aftermarket prospectus delivery requirement for dealers. An issuer that's listed on the NYSE or Nasdaq is required to file reports with the SEC (a reporting issuer). If the issuer was filing for an IPO (a non-reporting issuer) and the securities will be subsequently listed on the NYSE or Nasdaq, the firm is required to deliver a prospectus to any purchaser in the aftermarket within 25 days of the effective date.
Which of the following statements BEST describes exchange-traded notes (ETNs)? ETNs are debt instruments linked to the performance of a commodity, currency, or index ETNs are equity securities that pay a large dividend ETNs are mutual funds that invest in debt instruments ETNs are equity securities that represent ownership of a securities exchange
ETNs are debt instruments linked to the performance of a commodity, currency, or index Exchange-traded notes (ETNs) are a type of unsecured debt security. This type of debt security differs from other types of fixed-income securities since ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity.
A corporation will be paying a cash dividend to its shareholders. On what date will the market price of the stock be reduced? Declared date Ex-date Record date Payment date
Ex-date The ex-date is the first day that a stock trades without its dividend included in its price. On the ex-date, the stock's price is reduced by the amount of (or enough to cover) the dividend. (17527)
Which of the following risks does not apply to both foreign and domestic debt instruments? Political Repayment Exchange Interest rate
Exchange Exchange (rate) risk could result in investors suffering losses due to a foreign currency losing value against the U.S. dollar. However, an investor who buys U.S. dollar denominated (domestic) debt is not subject to exchange risk. Interest rate risk is experienced when interest rates rise and prices of bonds fall, which impacts both foreign and domestic bonds. Repayment risk is an issue that impacts both foreign and domestic debt, since both foreign and U.S.-based issuers could default. Political risk could also impact both foreign and U.S. investments.
When interest rates are trending upward, the economy will normally be in which phase of the business cycle? Expansion Contraction Trough Peak
Expansion Increasing interest rates, along with increased costs and lower unemployment, are frequently associated with an expanding economy where there is an increasing demand for goods. As demand overtakes supply, prices begin to rise due to the scarcity of goods. This rise in prices is known as inflation. The Federal Reserve will look to raise interest rates in an attempt to curb demand and combat inflation.
The SEC rules regarding the record retention generally require that records be kept in an easily accessible location for the: First two years First three years First six years Life of the firm
First two years The SEC rules regarding record retention generally require that records be kept in an easily accessible location for the first two years. Records must generally be kept in total for either three years, six years, or the life of the firm depending on the specific record.
Final arbitration awards against registered representatives and/or firms are reported on which of the following forms? Form U5 Form U4 Form U6 Form BD
Form U6 Form U6 is used to report disciplinary actions against RR's and firms as well as final arbitration awards against individuals or firms. Form U4 is filed with FINRA when a person is applying for securities registration. Form U5 is filed with FINRA when a person's registration is terminated. Form BD is filed by brokerage firms to register with FINRA, the SEC, and states.
A previously registered person was convicted of a felony 14 years ago and has served out his sentence in federal prison. If he's now seeking employment as a registered representative, he should be informed that: He may be hired as a registered representative He may not be hired as a registered representative He may be hired to provide investment advice to customers, but will not be permitted to receive compensation based on these transactions He may be hired to provide financial advice, but will not be permitted to become registered
He may be hired as a registered representative A convicted felon is barred from the securities business for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. Since the conviction was more than 10 years ago, the person may be hired as a registered representative. There are no special restrictions concerning registration and compensation of the person who was previously subject to statutory disqualification.
All of the following characteristics would be associated with a growth company, EXCEPT that it has a: High price/earnings ratio High dividend payout ratio High amount of research and development costs Wide trading range for the price of its stock
High dividend payout ratio Growth companies will normally retain most of their earnings to enable them to continue their growth. They would typically have low dividend payout ratios, high research and development expenses, and high price/earnings ratios, as well as a wide trading range for the stock.
Three business partners have opened a brokerage account as Joint Tenants with Right of Survivorship (JTWROS). All of the following statements are TRUE, EXCEPT: If one partner dies, his interest in the account will pass to his estate The firm may accept an order from any of the partners Checks that are issued by the firm from the account must be in the name of all of the owners When opening the account, the firm must obtain Social Security numbers from all three owners
If one partner dies, his interest in the account will pass to his estate An account that is established under the JTWROS, the interest of a deceased owner will pass to the surviving owners of the account. If the account had been opened under the Tenants-in-Common form of ownership, the deceased partner's portion would flow to their estate.
An registered person has purchased two tickets to attend a basketball game with a client. If the tickets cost $85 each, which of the following statements is NOT TRUE? Under FINRA rules, this is considered entertainment. If the registered person did not attend the game and gave one of the tickets to the client, it is a violation. If the registered person did not attend the game and gave both of the tickets to the client, it is a violation. This doesn't require the approval of a principal of the firm.
If the registered person did not attend the game and gave one of the tickets to the client, it is a violation. Under FINRA rules, member firms and their associated persons may not provide gifts that exceed $100 per year to employees of other firms when the gift is in relation to the securities business of the recipient's employer. The underlying concern is that excessive gifts could cause the recipient to act contrary to the interests of the broker-dealer and/or clients. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (e.g., boxes of pens, key chains), and expenses related to legitimate business travel. For an activity to be considered an expense, the associated person of a broker-dealer must attend the event with the client. This type of activity is considered a legitimate expense. Since one ticket is valued at $85, it may be given to the client. On the other hand, two tickets being given to the client exceeds the $100 limit. Although approval by a principal is not required, a member firm should have this type of activity included in its policies and procedures manual.
A broker-dealer must establish information barriers between which two departments? Research and compliance Retail and institutional sales Human resources and retail sales Investment banking and trading
Investment banking and trading Information barriers must be maintained at firms to prevent the flow of certain information between different departments at the firm. Much of the focus is on preventing the free flow of information between investment banking and other departments. In fact, most of the communication between investment banking and other departments is made through compliance. (17580)
A registered representative is sending an email to five clients. Which of the following statements is TRUE? It is considered correspondence and subject to review by a principal. It is considered correspondence and subject to pre-approval by a principal. It is considered retail communication and subject to review by a principal. It is considered retail communication and subject to pre-approval by a principal.
It is considered correspondence and subject to review by a principal. It is considered correspondence and subject to review by a principal. Correspondence is defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Retail communications are generally subject to pre-approval; however, correspondence and institutional communications are subject to review and supervision.
Which of the following statements about Form 10-K is TRUE? It must be filed with the SEC within 40 days of the end of the fiscal quarter. It contains voting information and must be sent to shareholders before an election. It must be filed with the SEC within 60 days of the end of the fiscal year. It must be offered to shareholders on a monthly basis.
It must be filed with the SEC within 60 days of the end of the fiscal year. A Form 10-K must be filed within 60 days of a company's fiscal year-end. A Form 10-Q (not a Form 10-K) is filed within 40 days of the end of a firm's fiscal quarter. Form 10-K is not required to be sent to shareholders; instead, companies are required to send their annual report to shareholders, which is less detailed than Form 10-K. Proxies contain information about corporate elections and must be sent to owners before a vote is made.
Which of the following statements is NOT TRUE about a fidelity bond? It protects customers in the event their broker-dealer goes bankrupt. It's insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. FINRA must be notified if the bond is cancelled or substantially modified. It covers securities that are held at the brokerage firm as well as those in transit.
It protects customers in the event their broker-dealer goes bankrupt. A fidelity bond does not protect customers in the event of broker-dealer bankruptcy; that's the role of SIPC. Instead, a fidelity bond is insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. The bond covers securities that are held at the brokerage firm as well as those in transit. FINRA must be notified if the bond is cancelled or substantially modified.
Which of the following are short-term trading vehicles? Mutual funds Oil and gas programs Real estate programs Leveraged ETFs
Leveraged ETFs Due to the inherent volatility of leveraged ETFs, they are appropriate as short-term trading vehicles. Each of the other choices are considered longer term investments.
Which types of investments have historically shown a great deal of sensitivity to regulatory risk? Limited partnerships Corporate bonds Common stocks Variable annuities
Limited partnerships Regulatory risk is the possibility that changes in regulations can have an adverse impact on the value of investments. This is very similar to legislative risk, which is the risk associated with changes in laws. Although all kinds of investments can be subject to regulatory and legislative risk, limited partnerships have historically been particularly vulnerable. For example, adverse changes in the tax laws can cause the value of many limited partnerships to decline.
Which of the following securities would be subject to federal securities registration requirements? Securities offered through a private placement GNMA securities Municipal bonds Mutual fund shares
Mutual fund shares Mutual fund shares would be subject to registration requirements at the state and federal level. The other securities are exempt from federal and state registration requirements. GNMA securities (U.S. government agency securities) and municipal securities are exempt securities. Private placements are exempt offerings.
When is a dividend payment made? On the payment date On the record date On the ex-dividend date On the declaration date
On the payment date A company will pay its shareholders a dividend on the payment date. The record date is the date that an investor must own the stock to be entitled to the dividend. The ex-dividend date is the first day that an investor can buy stock without receiving the dividend. The declaration date is the date on which the company announced that it will pay a dividend.
The current market value of a stock is below the strike price of a call option. This situation is referred to as: At-the-money In-the-money Out-of-the-money Behind-the-money
Out-of-the-money Call options are in-the-money when the current market value of the underlying stock is above the option's strike price. However, if the stock's market price is below the strike price of a call, the option is out-of-the-money. Out-of-the-money and at-the-money options have no intrinsic value.
An investor in a mutual fund: Owns the actual securities in the portfolio Owns shares which represent an interest in the portfolio Is considered a creditor of the portfolio Is considered a limited partner in the fund
Owns shares which represent an interest in the portfolio An investor in a mutual fund owns shares which represent an interest in the portfolio, but does not actually own the assets or shares that are held in the mutual fund's portfolio.
An investor shifted the allocation of corporate bonds in his portfolio to American Depository Receipts (ADRs). As a result, he will be more exposed to: Political risk Liquidity risk Credit risk Interest-rate risk
Political risk ADRs are depository receipts for foreign equities. Although ADRs trade in the U.S., they are subject to the risks of investing in foreign securities. Political risk is the risk that foreign investors will lose money as a result of changes in a specific country's government or regulatory environment. Many investments are subject to liquidity risk. Credit and interest-rate risk are usually associated with bond investments. (17599)
When discussing the purchase of a variable annuity with a client, the RR is not required to disclose: Surrender fees Mortality fees Probate fees Administrative fees
Probate fees Probate fees and costs are associated with establishing the validity of a will, which is not a disclosure item for annuities. However, surrender, mortality, and administrative fees must be disclosed. (17541)
A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences? All proceeds are considered a return of capital. The growth is taxable as a capital gain to the beneficiary. Proceeds in excess of cost are taxable as ordinary income to the beneficiary. The growth above cost is not taxable if the beneficiary rolls it over into a retirement plan.
Proceeds in excess of cost are taxable as ordinary income to the beneficiary. When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income. (37383)
A broker-dealer is acting as a distribution participant in a public offering of stock. To entice customer purchases, the firm pledges to repurchase shares sold in the offering from its customers at a price that's higher than the original public offering price (POP). This type of pledge is: Prohibited unless the customers are free to sell the securities into the open market Allowed if the firm immediately sets aside funds for the repurchase Allowed if the customers' securities and cash are deposited into escrow Prohibited, fraudulent, and manipulative
Prohibited, fraudulent, and manipulative This question relates to a tie-in arrangement, which may be used to artificially increase the price of a stock in the secondary market. These prearranged purchases are prohibited because they're manipulative and harm other market participants. Underwriters are prohibited from prearranging purchase orders which guarantee the clients a profit (i.e., buying shares back at a price that's equal to or higher than the POP).
A registered representative has recently passed the Series 7 Examination. If the RR conducts business in five states, she is required to: Register in three of the five states Notify FINRA, but not required to register in any of the states Register in the states in which she has an office Register in all five states
Register in all five states In addition to ensuring that RRs are properly registered under FINRA rules, RRs also need to be properly registered as agents in each state in which they conduct business. State registration rules are contained within the Uniform Securities Act.
If a customer purchases securities and fails to pay for them by the payment date, the brokerage firm will: Sell out the securities and freeze the account Notify the Federal Reserve Board Notify the SEC Close the customer's account for a specified period
Sell out the securities and freeze the account When a customer purchases securities and fails to pay by the Reg T payment date (within two business days following settlement), the brokerage firm will sell out the securities and freeze the account for 90 days.
FINRA prohibits selling away and it can be best described as: Recommending that a customer use the services of another broker-dealer (BD) Splitting commissions with other registered representatives of the same broker-dealer Advising customers to buy mutual fund shares at a dollar amount just below a discount level Selling securities in private transactions without prior written consent of the employing broker-dealer
Selling securities in private transactions without prior written consent of the employing broker-dealer Selling away occurs when a registered representative (RR) engages in a securities transaction that's outside of the regular scope of their employment with a member firm. Recommending the services of another broker-dealer is not prohibited. Splitting commissions with another RR of the same BD is not prohibited. Advising customers to buy mutual fund shares at dollar levels just below a breakpoint is prohibited and is referred to as "breakpoint selling," not "selling away."
An equity inverse exchange-traded fund (ETF) is most similar to: A real estate investment trust (REIT) Buying on margin An equity mutual fund Selling stock short
Selling stock short An equity inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. Similarly, a customer who sells stock short is anticipating a decline in the price of the equity securities. For example, an inverse ETF that's based on the DJIA seeks to deliver the opposite performance of that index. Therefore, if the DJIA rises by 1%, an inverse ETF's value should decrease by 1%. Conversely, if the DJIA falls by 1%, the inverse ETF's value should increase by 1%.
When bond issues have staggered maturity dates, they're referred to as: Term bonds Sinking fund bonds Serial bonds Zero-coupon bonds
Serial bonds Bonds with staggered maturity dates are referred to as serial bonds. For serial bonds, the principal amount outstanding is reduced over time. On the other hand, term bonds have one maturity date.
A registered employee is required to disclose which of the following activities to her employing broker-dealer? Volunteering for a local charity every Thursday night. Serving as a director for a profit-based firm Volunteering for a local charity on a one-time basis. Playing basketball in a city-wide tournament
Serving as a director for a profit-based firm Registered employees must disclose all outside business activities to their employers. Volunteering or playing sports don't require disclosure since the registered representative is not receiving compensation.
A covered call writer can be described as being: Short the call, and short the stock Short the call, and long the stock Long the call, and short the stock Long the call, and long the stock
Short the call, and long the stock When writing (or selling) the call, the investor is said to be short the call. A covered call writer will currently own the underlying securities, and hence be long the stock.
When do options trades settle? T + 1 T + 2 T + 4 At expiration
T + 1 Options trades typically settle within one business day (T + 1). However, if equity options are exercised, the settlement of the stock transactions occurs on the second business day (T + 2).
A confirmation must be sent to a customer no later than: The trade date The business day after the settlement date The completion of the trade Two business days after the settlement date
The completion of the trade A broker-dealer must send a confirmation to a customer at or before the completion of the transaction, which is usually the settlement date.
If a customer exceeds SIPC limits: The customer will receive cash rather than his securities The customer is a secured creditor The customer doesn't have a claim to the excess amount The customer is a general creditor
The customer is a general creditor If a customer's claim exceeds SIPC limits, he becomes a general creditor.
Who is responsible for creating the official statement for a municipal bond offering? The issuer Bond counsel for the issuer The underwriting syndicate Bond counsel for the underwriting syndicate
The issuer Although assistance may be provided by others, the issuer is ultimately responsible for creating the official statement. If created, the underwriting syndicate is responsible for providing the official statement to investors who purchase the new offering. (17552)
Obtaining best execution includes all the following factors, EXCEPT: Price and volatility The general character of the market The size and type of transaction The number of market makers for the security
The number of market makers for the security For purposes of obtaining best execution. the factors considered include price and volatility of the security, general character of the market, size and type of transaction, and the locations and accessibility of the member organization to primary markets. However, the number of market makers for the security is not a factor.
Who keeps track of the shareholders of a mutual fund? The custodian bank The transfer agent The investment adviser The underwriter
The transfer agent The mutual fund's transfer agent is responsible for keeping track of all of the current owners of a mutual fund. Custodian banks provide for the safekeeping of the fund's securities and cash. The fund's portfolio is managed by the investment adviser.
Which of the following is subject to the LEAST amount of credit risk? Corporate bonds U.S. Treasury bonds Municipal bonds Eurodollar bonds
U.S. Treasury bonds Credit risk, also referred to as default risk, is the risk that a bond issuer will not make interest and/or principal payments on its bonds. Since U.S. Treasury bonds are backed by the U.S. government, they are considered to have no credit risk.
What's the maximum profit for the buyer of a call option? The premium The strike price The strike price minus the premium Unlimited
Unlimited The maximum gain for the buyer of a call option is unlimited. A buyer of a call option will realize a profit if the underlying stock rises above the breakeven point. Since a stock's increase is unlimited, so too is the potential profit for the buyer of a call. On the other hand, if the stock doesn't rise and instead falls below the strike price (i.e., the option is out-of-the-money), the buyer's maximum loss is the premium paid.
When is an underwriting broker-dealer able to accept payment from an investor for the purchase of a new issue? When the registration is declared effective. After the delivery of the red herring. When the preliminary prospectus is amended. Only if the transaction takes place during the cooling-off period.
When the registration is declared effective. Broker-dealers can only accept payment for a new issue after a security's registration is declared effective. The red herring is also referred to as the preliminary prospectus and is given to investors before the effective date. The cooling-off period lasts between the date on which an issuer files its registration statement with the SEC and the effective date of the offering. During the cooling-off period, no sales can be confirmed and no payment can be accepted. (17639)
In judging the fairness of a firm's markup, industry rules would NOT consider: Whether the security was debt or equity The availability of the security in the market The pattern of markups Whether the client was a retail or institutional customer
Whether the client was a retail or institutional customer Among the relevant factors that a member may consider in determining a fair markup or commission are the following. The type of security involved (Common stock would normally demand a higher markup than debt.) The availability of the security in the market (actively or inactively traded) The price of the security The amount of money involved in the transaction Disclosure (made prior to the execution of the transaction may be relevant) The pattern of markups The nature of the member firm's business (What type of services does the member provide to the customer?) The type of client is not specifically mentioned in the rules as determining whether the markup or commission is fair and reasonable.
