Exam Notes 12/19
Traders in stock index options are exposed to: A) systematic risk. B) redemption risk. C) credit risk. D) call risk.
A) systematic risk Systematic risk is the possibility that an overall decline in the market will cause a loss in an investment. Index options investors are exposed to the risk that market movement will cause the option positions to move adversely.
A customer buys a municipal bond at 106 with 8 years to maturity. What is the amount of unamortized premium at the end of 4 years? A) $50. B) $30. C) $36. D) $40.
B) 30 The original premium was $60 for 8 years, which means that after 4 years the remaining premium is half that amount. Reference: 15.5.7.1 in the License Exam Manual
The secondary trading of securities is comprised of how many markets? A) 2 B) 4 C) 3 D) 5
B) 4 The secondary trading of securities takes place in four markets: the first market is listed securities traded on an exchange floor; the second market deals with unlisted securities; the third market is where listed securities trade over the counter; and the fourth market is where financial institutions trade directly with each other, utilizing electronic communications networks (ECNs).
On the morning of the ex-date for a cash dividend which of the following orders on the order book will be reduced? A) Sell stop. B) All of these. C) Buy limit. D) Sell stop limit
B) All of these Those orders entered below the prevailing market (unless marked DNR) are reduced on the morning of the ex-date by the amount of the cash dividend. Those orders are buy limits and sell stops including sell stop limits.
Each of the following is a characteristic of money market funds EXCEPT: A) Offered without a sales load . B) High beta . C) Stable NAV. D) Portfolio of short-term debt instruments .
B) High Beta Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). Beta is a measure of volatility; money market funds have low betas.
A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How long does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request? A) 5 business days. B) 7 business days. C) 10 business days. D) 3 business days.
C) 10 business days. Upon receiving a customer request for a copy of the signed predispute arbitration agreement, the member firm has 10 business days to supply it.
A customer has a $10,000 debit balance. What is the maximum value of their securities that the broker/dealer can hypothecate? A) 2500. B) 5000. C) 14000. D) 10000.
C) 14000. The broker/dealer can hypothecate 140% of the customer's outstanding balance.
All of the following are restricted persons EXCEPT: A) finders and fiduciaries acting on behalf of the managing underwriter. B) portfolio managers. C) any persons owning 5% or more of a member firm. D) employees of members.
C) any persons owning 5% or more of a member firm Rules prohibit member firms from selling initial equity public offering stock to any account in which restricted persons are beneficial owners. Restricted persons include FINRA members, employees of member firms, finders and fiduciaries acting on behalf of the managing underwriter, portfolio managers, and any person owning 10% or more of a member firm. Also included are a restricted person's immediate family members.
Which of the following interdealer trades does NOT settle in clearinghouse funds? A) Corporate bonds. B) OTC stocks. C) U.S. government bonds. D) GO bonds.
C) U.S. Government Bonds Trades in securities backed by the federal government are settled in federal funds, not clearinghouse funds.
All of the following are true regarding a fail to deliver EXCEPT A) the buyer may buy in the securities owed to him and charge the seller for any loss incurred B) fail to deliver occurs when the selling BD does not deliver the securities in good deliverable form C) even though a fail to deliver has occurred and is still outstanding, FINRA mandates that the seller still be paid D) the BD representing the seller can also be liable for buying in the securities if the BD's customer has not made good delivery on the securities sold
C) even though a fail to deliver has occurred and is still outstanding, FINRA mandates that the seller still be paid The seller cannot be paid as long as the fail to deliver exists. Fail to deliver occurs when the selling BD does not deliver the securities in good deliverable form. The buyer or the selling BD can buy in the securities to complete the transaction, and any loss incurred to do so will become the responsibility of the seller who failed to deliver.
Losses from direct participation programs can be used to offset: A) earned income from salary or commissions. B) portfolio income. C) income from limited partnerships. D) none of these.
C) income from limited partnerships Passive losses can be used only to offset passive income, which is earned from direct participation programs and rental real estate.
If another member broker/dealer has already received clearance from FINRA for a retail communication, filing the piece with FINRA so that your broker/dealer can now use it A) must be done within 3 days after use by your broker dealer, even if unaltered B) must be done 10 days before your broker dealer can use it, even if unaltered C) is not necessary if unaltered and used as originally intended D) must be do before publication by your broker dealer whether it is altered or unaltered
C) is not necessary if unaltered and used as originally intended If unaltered and used as it was originally intended, re-filing with FINRA is not required. If the piece had been altered or was intended to be used in a manner inconsistent with how it had been originally intended to be used, filing with FINRA would be required.
The time value of an option that is at-the-money equals: A) it's intrinsic value less premium. B) zero. C) its premium. D) its intrinsic value.
C) its premium The option has no intrinsic value if the strike price equals the market price (at the money). The only value an option has is its time value, which equals the premium.
Which of the following statements regarding the good faith deposit submitted by interested bidders are TRUE? I. It is usually 1% to 2% of the total par value of the bonds offered. II. It is usually 10% of the total par value of the bonds offered. III. If the bid is unsuccessful, it is returned to the underwriting syndicate. IV. If the bid is unsuccessful, it is retained by the issuer. A) II and III. B) I and III. C) II and IV. D) I and IV.
B) I. & III. A good faith deposit is required when the syndicate places a bid on a competitive offering. It is generally 1% to 2% of the par value of the bonds offered for sale. If the bid is unsuccessful, the deposit is returned by the issuer to the syndicate manager.
A primary dealer has its bid on Treasury bills filled at the weekly auction. Settlement between the dealer and the Treasury will be: A) regular way. B) Thursday of that week. C) same day. D) next business day.
B) Thursday of that week Settlement for the weekly Treasury bill auction normally occurs on the Thursday of the same week as the auction.
Under the Securities Act of 1933, the Securities and Exchange Commission has the authority to: I. issue stop orders regarding a new issue registration filing. II. approve new issues. III. review standard registration forms. IV. guarantee the accuracy of the information contained in the registration forms. A) II and IV. B) I and III. C) II and III. D) I and IV.
B) I & III During the cooling-off period, the SEC reviews registration statements and can issue stop orders if the registration is not complete or was not filed properly. The SEC does not approve securities or guarantee that any information found within a prospectus is accurate; it only clears the securities for distribution (sale) to the public.
Which of the following would NOT be examples of overlapping debt? I. Debt to build a state office building within city limits. II. Debt to maintain a county park district serving a municipality. III. Debt backed by two states cooperating in the construction of a bridge. IV. Debt for a high school district within city limits.
I. & III. State debt cannot overlap with any other municipal entity.
The delivery of which of the following to a broker/dealer would be considered a fail to deliver? A mutilated certificate. A municipal bond without the legal opinion attached. A bond trading ex-legal without a legal opinion attached. Certificates delivered in par value denominations totaling the amount of the transaction. A) III and IV. B) II and III. C) I and III. D) I and II.
D) I & II A mutilated certificate would not be considered good delivery nor would a bond delivered without the legal opinion attached unless it was trading ex-legal meaning no legal opinion was ever rendered. Bond certificates delivered in par value denominations should add up to the total amount of the transaction.
In a competitive bid, which of the following would the issuer need to determine net interest cost? I.Coupon rates. II.Basis. III.Dollar price. IV.Spread. A) III and IV. B) I and II. C) II and IV. D) I and III.
D) I & III The coupon rate and dollar price are important to the issuer because they determine the actual cost of borrowing. The spread and basis at which the bonds will be resold are important to the underwriters, but not to the issuer.
Which of the following statements CORRECTLY describe a Roth IRA? The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is greater. The maximum annual contribution is 100% of earned income or a maximum allowable dollar limit, whichever is less. Contributions are tax deductible. Contributions are not tax deductible. A) I and IV. B) II and III. C) I and III. D) II and IV.
D) II & IV The maximum annual contribution to a Roth IRA is 100% of earned income, not to exceed a maximum allowable dollar limit. Contributions are made with after-tax dollars.
Compensation paid to research analysts may: I. be tied to specific investment banking transactions. II. not be tied to specific investment banking transactions. III. be tied to the firm's investment banking revenue. IV. not be tied to the firm's investment banking revenue. A) I and III. B) II and IV. C) I and IV. D) II and III.
D) II. & III. Compensation may never be tied to a specific investment banking transaction because the conflict of interest is too severe. However, compensation may be tied to the firm's overall investment banking revenue, but it must be disclosed in research reports.
The Act of 1933 applies to all of the following EXCEPT: A) registration of new issues . B) prospectus preparation. C) full and fair disclosure. D) regulation of insider trading.
D) Regulation of insider trading The regulation of insider trading is covered under the Act of 1934. The Act of 1933 deals with new issues and related disclosures.
Under the Uniform Transfer to Minors Act, all of the following statements are true EXCEPT: A) only an adult may make a gift to a minor in a custodial account. B) an UTMA account may have only one custodian for only one minor. C) the maximum amount of money an adult may give to a minor in any one year is an amount indexed for inflation. D) once a gift is given to a minor, it may not be reclaimed.
C) the maximum amount of money an adult may give to a minor in any one year is an amount indexed for inflation. Any adult may give a gift to a minor in a custodial account. There is no limitation on the size of the gift. Gifts in excess of the indexed maximum may be subject to a gift tax.
Under FINRA rules on account transfers, the carrying member must transfer the positions in the account to the receiving member within how many business days of validation? A) 5. B) 4. C) 7. D) 3.
D) 3 The carrying firm must transfer the positions within 3 business days of validation.
In an initial transaction in a margin account a customer sells short 200 ABC at $18 per share. The credit balance in the account is: A) 5400. B) 2000. C) 2400. D) 5600.
D) 5600 The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000, therefore the credit balance is $5,600 ($3,600 + $2,000 = $5,600).
Which of the following bonds is most affected by interest rate risk? A) 7s of '22 yielding 7%. B) 7.8s of '27 yielding 7.3%. C) 7.5s of '24 yielding 7.2%. D) 7.6s of '31 yielding 7.2%.
D) 7.6s of '31 yielding 7.2%. Interest rate risk is the loss in value due to a rise in interest rates. Since there is little difference in coupon rates, the bond with the longest maturity (highest duration) will experience the greatest fall in a rising interest rate market.
An investor files the necessary forms to sell stock under Rule 144. The filing is effective for a maximum of how many days? A) 30. B) 60. C) 120. D) 90.
D) 90
A rider or statement of condition that allows a variable life insured to maintain policy coverage after becoming disabled is a benefit known as A) waiver of premium B) life income C) annuity phase D) minimum guaranteed death benefit
A) Waiver of premium Waiver of premium is a benefit available on qualified life insurance contracts, usually in the form of a rider, which provides for the waiver of premium payments that fall due while the policyholder is totally disabled.
Which of the following is applicable to the NASDAQ OMX PHLX? I. Regional exchange operated by Nasdaq II. Offers trading in equity securities and options contracts III. Is a completely electronic exchange with no physical trading floor IV. Regional exchange operated by FINRA for the execution of OTC stocks only A) I and II B) II and III C) I and III D) I and IV
A) I & II The OMX PHLX is a regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on floor.
Which of the following statements regarding put and call features of bonds are TRUE? I. The put feature would likely be exercised if interest rates fall. II. The put feature would likely be exercised if interest rates rise. III. The issuer will likely call bonds if interest rates fall. IV. The issuer will likely call bonds if interest rates rise. A) II and III. B) I and IV. C) I and II. D) III and IV.
A) II. & III. A put feature on a bond benefits the bondholder. Once the bond becomes puttable, its holder has the right to put it back to the issuer at par. At this point, the bondholder is insulated from rate risk (the risk that rates will rise, putting downward pressure on bond prices). Once puttable, the bond will not trade below par. Issuers will likely call bonds if rates fall. The issuer can issue new bonds at a lower rate and use the proceeds to call in the original bond.
Income from all of the following is partially exempt to a corporate investor EXCEPT: A) income from convertible bonds. B) income from preferred stock mutual funds. C) income from common stock. D) income from preferred stock.
A) Income from convertible bonds Seventy percent of dividend income received from investments in common stock and preferred stock is excluded from taxation for a corporate investor. This exclusion applies to dividends from mutual funds where all of the portfolio securities are preferred or common stock.
Which of the following are directly backed by the U.S. government? A) PHAs and NHAs. B) GO bonds. C) Moral obligation bonds. D) Double-barreled bonds.
A) PHAs and NHAs. Public Housing Authority and New Housing Authority issues are unique as municipal instruments because they are fully backed by the U.S. government.
The unqualified legal opinion on a municipal bond states that: A) the issuer is creditworthy. B) the issuer has the authority to issue bonds that are legal, valid, and enforceable obligations of the issuer. C) the bond has passed the additional bonds test (parity test). D) the bond is marketable.
B) the issuer has the authority to issue bonds that are legal, valid, and enforceable obligations of the issuer. Bond counsel attests that, to the best of its knowledge, the issuer has the legal right to issue the securities in question. In the case of tax-exempt bonds, the interest the issuer will pay on the bonds is exempt from federal taxation and the bonds are exempt from federal registration requirements. The legal opinion does not go to the issue's marketability, or safety, debt service requirements.
The amount paid into a defined contribution plan is set by the: A) employee's age. B) trust agreement. C) ERISA-defined contribution requirements. D) employer's profits.
B) trust agreement A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.
A customer buys $10,000 worth of new issue municipal bonds at a price of 104 and the bonds have 10 years to maturity. Four years after purchasing the bonds, she sells them at 99. What is the tax loss on these bonds? A) 160. B) 400. C) 340. D) 500.
C) 340 To arrive at adjusted cost basis the premium on a new issue municipal bond must be amortized (subtract). To amortize the premium annually, divide the premium amount (in this case, $400 on the total purchase of 10 bonds) by the number of years until maturity (10). Thus, the customer writes down the initial cost by $40 per year. After 4 years, the bonds purchased at a cost of $10,400 will be written down to $10,240 (4 years $40 per year = $160). If the bonds are sold for $9,900, the tax loss is $340 ($10,240 − $9,900 = $340).
Your client has entered a limit order to buy 600 shares of DMF at $50 per share. DMF declares a 10% stock dividend. How would this order be adjusted on the ex-date? A) 600 shares at $50. B) 660 shares at $46.37. C) 600 shares at $45.45. D) 660 shares at $46.50.
C) 600 shares at $45.45 50 / 1 +.10 = 45.45
If an investor has an established margin account with a current market value of $4,400, and a debit balance of $1,750 with Regulation T at 50%, how much buying power does the investor have in the account? A) 4400. B) 2200. C) 900. D) 2650.
C) 900 The Regulation T requirement is 50% of the current market value of $4,400, which equals $2,200. Equity equals the current market value of $4,400 minus the debit balance of $1,750, which equals $2,650. Excess equity is calculated by subtracting the Regulation T requirement of $2,200 from the current equity of $2,650, which equals $450. Buying power is then calculated by multiplying the excess equity of $450 by 2, which equals $900.
Which of the following statements regarding municipal revenue bond issues are generally TRUE? The bonds' feasibility is dependent on the earnings potential of the facility or project. The bonds are backed by unlimited taxing power of the issuer. User fees provide revenue for bondholders. Revenue bonds are most suitable for investors with high risk tolerance. A) II and III. B) II and IV. C) I and III. D) I and IV.
C) I & III Revenue bonds are backed by project earnings (user fees), not taxes, and are generally considered low risk.
If a customer purchases shares in a municipal bond fund, which of the following statements are TRUE? Dividends are taxable. Dividends are not taxable. Capital gains distributions are taxable. Capital gains distributions are not taxable. A) I and IV. B) I and III. C) II and III. D) II and IV.
C) II & III Municipal bond funds distribute federally tax-free dividends, but any capital gain distribution is subject to taxation. The tax preferential treatment of municipal bonds is limited to the interest income earned, not the gains.
Which of the following terms refer to municipal bond underwritings? Standby. Best efforts. Preliminary prospectus. Firm commitment. A) II and III. B) I and III. C) II and IV. D) I and IV.
C) II & IV Negotiated municipal underwritings can be performed on a firm commitment, best efforts or all-or-none basis. Standby underwritings are used only for corporate underwritings. The term preliminary prospectus, or red herring, refers to a corporate underwriting. In a municipal underwriting, the issue is described in the official statement or, if prepared, a preliminary official statement.
The Bank Secrecy Act requires broker/dealers to establish internal compliance procedures to detect and prevent money laundering. Three distinct phases of money laundering have been identified. Which of the following is NOT one of those phases? A) Layering. B) Integration. C) Qualification. D) Placement.
C) Qualification
An investor purchases 5 Mt. Vernon Port Authority J & J bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price? A) 110. B) 114. C) 108. D) 112.
D) 112 Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. Therefore, July, August, and September each have 30 days of accrued interest and October has 22 days of accrued interest; this totals 112 days. Settlement date is Monday, October 23.
Trading was resumed on DEF stock after a halt following the release of a news item. All of the following would most likely have lowered the price of the stock when trading was resumed EXCEPT: A) the company filing an offering to sell 30% more shares. B) the CEO resigning over a dispute with the board of directors. C) the Justice Department announcing that it opposes the company's merger with another company. D) another corporation tendering for the company's shares.
D) another corporation tendering for the company's shares. Another corporation tendering for the company's shares would tend to increase the price.
Lifecycle funds embody all of the following characteristics EXCEPT A) the objective assumes that as an investor nears retirement, the investor's tolerance for risk will diminish B) these funds are usually structured as funds of funds so that the entire composition of the fund portfolio consists of funds offered by the same fund family C) the asset allocation of the fund will be adjusted regularly to keep risk and reward balanced optimally, given the time remaining until the target date is reached D) as the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk
D) as the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk Lifecycle or target date funds are managed in such a way as to lessen the amount of risk associated with the portfolio as it gets closer to its target date, which is usually the anticipated time of retirement for the fund investor.