Exam Questions

A GTC order is left unexecuted at the end of the trading day on the last business day of April. Which of the following is TRUE? A. the order will be automatically canceled B. the order will be automatically renewed C. the order will only continue working through the opening of the next business day D. the customer must give specific instructions to cancel the order so that it will not continue as a good working order

A. (All GTC orders if unexecuted will be automatically canceled on the last business day of April and the last business day of October. If the customer wishes to have the order continue working beyond that date, it must be reentered after the automatic cancellation.)

U.S. government securities are A. issued by the US Treasury in book entry form B. issued by the Federal Reserve Board in book entry form C. issued by the Federal Reserve Board with physical certificates evidencing ownership D. issued by the US Treasury with physical certificates evidencing ownership

A. (All U.S. government securities issued by the U.S. Treasury are in book-entry form with no paper certificates.)

Rule 144 Control Stock

: Control stock is any security owned by an insider or affiliate (officer, director, or >10% shareholder) of that company. The sale of control stock is subject to volume limitations. Affiliates can sell the greater of: 1% of the outstanding shares, or The average reported weekly trading volume during the preceding four weeks

To tighten its monetary policy, making it more difficult for consumers to borrow money, the Federal Reserve Board can A. lower the federal funds rate B. raise the federal funds rate C. lower the discount rate D. raise the discount rate

D. (Wanting to tighten its monetary policy, which would make it harder for consumers to borrow money, the Federal Reserve Board can raise the discount rate—the rate it charges its member banks for short-term loans. This lessens the availability of money its member banks have to lend to consumers. The federal funds rate isn't a rate charged by the FRB but instead by large commercial banks to one another.)

Shares must be borrowed in order to A. buy to close a position B. sell short to close a position C. buy to open a position D. sell short to open a position

D. (When selling short, an investor is opening a position (a short position). Selling short means selling shares not yet owned. In order to do so, the shares must be borrowed first.)

Monetarist Theory

The idea that the amount of money in circulation (the money supply) is the primary influence on economic activity and inflation.

discount rate

The interest rate on the loans that the Fed makes to banks

A broker-dealer is confronted with margin deposit due but not yet received. The BD can choose to take no action, neither selling out the securities nor requesting an extension, if the amount due is A. $1,000 or more B. less than $4,000 C. less than the value of the securities purchased D. less than $1,000

D. (The required deposit will be 50% of the securities' value. If the deposit is late, the broker-dealer can either choose to sell out the securities or request an extension. However, for late deposits of less than $1,000, the broker-dealer can choose to take no action.)

Each of the following are likely to be found on a trade confirmation EXCEPT A. CUSIP B. commission C. description D. bond credit rating

D. (Trade confirmations are required to include many details about the trade and the securities including, but not limited to, the trade date, description of the security, CUSIP number, commissions (not markups or markdowns) and more. There is no obligation for the firm to print the bond credit rating on the trade confirmation.)

T-notes

coupon debt with original maturity between one and ten years

T-Bonds (Treasury Bonds)

-Long-term securities that pay interest every 6 months -Issued and mature in more than 10 years -T-bonds are priced the same as T-Notes (1/32 of a percentage)

Which of the following characteristics are typical of an exchange-traded product? A. the value of an ETP is derived from other investment instruments, and it trades on a national securities exchange B. an ETP is an ineligible investment for retail customers, and may not be purchased on margin C. an ETP is marginal but may not be sold short D. The value of an ETP is derived by formula disclosed in the prospectus and it trades on an exchange only after normal trading hours

A. (ETPs are priced so that the value of the product is derived from other investment instruments, such as a commodity, a currency, a share price or an interest rate. ETPs are benchmarked to stocks, commodities or indices. They are marginable and may be sold short.)

Which of the following are potential benefits associated with a real estate direct participation program? A. tax deductions B. depletion allowances C. Dividends and interest D. intangible costs

A. (For real estate programs, both deductions (from mortgage interest expenses and depreciation) and credits (for certain types of programs) are potential benefits. Depletion and intangible costs are associated with natural resource programs such as oil and gas, and DDPs do not pay dividends or interest.)

The minimum number of principals that a member firm of FINRA may have is A. 1 B. 4 C. 2 D. 3

A. (If the member firm is a sole proprietorship, only 1 principal is required; otherwise, the firm must employ at least 2 registered principals.)

Which of the following would cause a mutual fund's NAV per share to fall? I. The fund purchases securities for the portfolio II. The fund pays a dividend to shareholders III. The market value of the portfolio declines. IV. A large number of shares are redeemed A. II and III B. I and IV C. II and IV D. I and III

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

Penny stock rules I. apply to both solicited and unsolicited transactions II. specify that established customers of the firm need not sign a suitability statement III. mandate that an account holding penny stocks only need not be provided with a monthly statement IV. require that prospects be given a copy of r risk disclosure document before their initial penny stock transaction

A. (Penny stock rules only apply to solicited transactions, and it is required that the penny stock disclosure document be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.)

Which is the most common way investors pay a mutual fund's sales charge? A. Front end load B. Variable load C. level load D. back end load

A. (The front-end load is the most common way a mutual fund's sales charge is paid. The sales charge is paid at the time of purchase. Front-end load, or Class A, shares have lower expenses than other classes, because the fund does not have to keep books on sales charge payments. It's already taken care of.)

A customer believes the price of MJS stock will rise but is not currently in a position to purchase the stock outright. How could the customer use options to profit from a rise in the stock's price? I. Buy calls II. Write calls III. Buy puts IV. Write puts A. I and IV B. II and IV C. I and III D. II and III

A. (The investor believes the stock's price will rise and therefore is bullish. Buying calls and writing puts are bullish strategies, while buying puts and writing calls are bearish strategies.)

An investor bought a put option and, in time, the underlying security declined below the strike price of the put. The put would probably A. be exercised B. decline in value C. be worthless D. not be exercised

A. (This is exactly what most put option buyers are looking for. They want the stock to go down. Because the market price of the stock declining would cause the option to be in the money, the investor would either exercise the option or sell it.)

An investor owning 500 shares of stock worth $40 per share receives notice that the stock will undergo a split. When the split is completed, the investor owns 400 shares of stock worth $50 per share. The split must have been I. a forward split II. a reverse split III. an uneven split IV. an even split A. II and III B. B. I and IV C. II and IV D. I and III

A. (This split reduced the number of shares, which makes it a reverse split. This investor now owns 400 shares when previously they had 500 shares, which would be expressed as a 4:5 split. Since neither number in the ratio is 1, it is an uneven split.)

supply-side economics

An economic philosophy that holds the sharply cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government.

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at A. current market value B. par value or higher C. par value D. par value or lower

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

State registration is not required if the transaction is exempt. An example of an exempt transaction would be A. one involving US gov't bonds B. one that is unsolicited C. one involving municipal bonds D. one that is solicited

B. (Purchases and sales that are unsolicited (unsolicited transactions) are exempt under the blue-sky (state securities) laws. Municipal bonds and U.S. government bonds are examples of exempt securities, not transactions.)

Of the following strategies, which is considered most risky in a strong bull market? A. buying calls B. writing calls C. Buying puts D. writing puts

B. (Short (writing) calls are bearish and have an unlimited maximum loss potential. In wanting the stock to go down, one's risk is that the underlying stock goes up and, in theory, could go as high as infinity.)

The coupon payable on a bond may also be referred to A. the nominal or principal yield B. the stated or nominal yield C. the term or serial yield D. the stated or principal yield

B. (The coupon rate is also called the stated or nominal yield. It is the rate of interest the issuer has agreed to pay the investor for use of the funds loaned to the issuer.)

An investor is long 300 shares of MAS at 45. The stock has just undergone a 3:1 split. The investor's new position is A. long 100 shares at 15 B. long 900 shares at 15 C. long 100 shares at 45 D. long 900 shares at 45

B. (The split is a "forward" split, which means the number of shares increases, while the price decreases. At 3:1, the number of shares goes up by a factor of 3 and the price goes down by a factor of one-third (i.e., to one-third of its previous value). The rule is that the total value of the position must remain unchanged before and after the adjustment. In this case, the original position's value was 300 shares × $45, or $13,500. The new position is valued at 900 × $15, which is also $13,500.)

An investor holds a Treasury note with a stated interest of 6%. The investor will receive A. one $6 interest payment per year B. two $30 interest payments per year C. two $60 interest payments per year D. one $60 interest payment per year

B. (Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in 2 payments of $30 each.)

Regarding purchases on margin, which of the following is TRUE? A. warrants and rights can both be purchased on margin B. Warrants can be purchased on margin, but rights cannot C. Neither rights nor warrants can be purchased on margin D. Rights can be purchased on margin, but warrants cannot

B. (Warrants are marginable securities, but rights are not.)

Different degrees of inflation can impact the economy differently. Which of the following best reflects this? A. High inflation pushes prices to their highest levels, continuously pushing the economy higher B. Mild inflation can encourage growth and stimulate the economy C. High inflation spurs the economy forward increasing the demand for goods D. Mild inflation can thwart business and slow economic investments and slow economic growth

B. (While mild inflation can encourage economic growth because gradually increasing prices tend to stimulate business investments, high inflation pushes prices up, reducing the U.S. dollar's buying power. Ultimately, high inflation hurts the economy.)

MAS Corporation has enjoyed an extremely profitable year. It has been determined that those owning the MAS 4% preferred, participating to 6% preferred shares, will receive the full participating dividend. The participating shareholders will receive an additional dividend of A. 4% B.2% C. 6% D. 10%

B.(The stated MAS preferred dividend is 4%, participating up to 6%. In this year, when it has been determined that they should receive the full participating dividend, they will receive the additional participating 2%.)

A registered representative has a customer who is interested in utilizing options strategies such as spreads and straddles. The RR's firm does not offer options transactions as part of their existing business model. As such, the RR directs the customer to open an account through another broker-dealer. This would be known in the securities industry as A. placing away B. investing away C. selling away D. trading away

C. (A private securities transaction is any sale of securities outside an associated person's regular business and his employing member. Private securities transactions are also known as selling away. If an associated person wishes to enter into a private securities transaction, that person must provide prior written notice to his employer, describe in detail the proposed transaction, describe in detail the RR's proposed role in the transaction, and disclose whether they have or may receive compensation for the transaction.)

An investor believes the price of an exchange-listed stock will likely fall in the near term. Which of the following option strategies would best support this belief? A. Selling puts B. Buying calls C. Buying puts D. Buying both calls and puts

C. (A put buyer is a bearish investor because she anticipates the market to fall. The put is exercised only if the market price of the stock falls below the strike price.)

Mrs. Jones is an employee of a member firm and as such is a restricted person regarding the purchase of new issues. She belongs to an investment club and has a 1% interest in the club's brokerage account. The investment club A. is not a restricted account but will not be allowed to purchase equity shares of an IPO B. is a restricted account but will be allowed to purchase equity shares of an IPO C. is not a restricted account and will be allowed to purchase equity shares of an IPO D. is a restricted account and will not be allowed to purchase equity shares of an IPO

C. (Because the restricted person's interest in the club's brokerage account does not exceed 10%, the investment club account is not considered a restricted account. If not restricted, the club can purchase shares of an equity issue at the public offering price if it chooses to.)

T-bonds and T-notes A. are both priced at a discount to par B. have interest that accrues until paid at maturity C. are both priced as a percentage of par D. have interest paid on an annual basis

C. (Both Treasury notes and bonds are priced as a percentage of par. Interest on these is paid semiannually. Comparatively, T-bills are priced at a discount to par with the interest not paid until maturity (the difference between the discount paid and par value received).)

A registered representative enters a discretionary order for her clients account. All of the following are required EXCEPT A. a record of the order must be maintained B. the order must be identified as or marked discretionary C. the order must be approved by a principal prior to entry D. the order should be included in those required to be reviewed frequently

C. (Each discretionary order must be identified as such at the time it is entered for execution, a principal, officer or a partner of the BD must approve each order promptly and in writing, but not necessarily before order entry, a record must be kept of all transactions including discretionary ones, and as with all trading activity, it is subject to frequent and systematic review by a designated supervisor or manager.)

Registered representatives who have not completed their regulatory element training in the prescribed time frame will have their registrations A. suspended and subject to a fine of not more than $500 B. permanently revoked and subject to criminal charges C. deactivated by FINRA until the requirements of the program are met D. suspended for a period of 60 days and reinstated when the requirements of the program are met

C. (If a person fails to complete the regulatory element within the prescribed time period, FINRA will deactivate that person's registration until the requirements of the program have been met.)

A shareholder owns preferred shares that allow for the possibility of receiving more than the stated dividend. This type of preferred share would be known as A. adjustable B. callable C. participating D. convertible

C. (In addition to the fixed stated dividend, participating preferred stock offers its owners the possibility of receiving a share of corporate profits that remain after all dividends and interest due other securities are paid.)

All of the following are true regarding market indexes EXCEPT A. the are performance standards investors can monitor B. they can be used to compare against the performance of one's portfolio C. they track single stocks rather than hypothetical portfolios D. they can demonstrate the overall direction of the market

C. (Indexes such as the DJIA or the S&P 500 are hypothetical portfolios, not single stocks. While there's no single standard or benchmark, an index can be used as a performance standard one can monitor and therefore judge the performance of a portfolio or investment against. When we refer to the stock market's performance in general, we are most likely referring to the performance of an index or average that tracks stocks or bonds. These benchmarks can serve as an indicator of the overall direction of the market as a whole, or the direction of individual market sectors.)

All of the following are restricted persons EXCEPT A. employees of members B. portfolio managers C. individuals owning 5% or more of a member firm D. finders and fiduciaries acting on behalf of the underwriters

C. (Rules prohibit member firms from selling public offering stock in equities 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 underwriters, portfolio managers, and any person owning 10% or more of a member firm. Also included are the immediate family members of any restricted persons.)

An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor A. must wait 6 months before selling shares subject to volume limits B. can only sell subject to volume limits C. can sell the shares unrestricted at any time D. must wait 6 months before any sales can be made

C. (Selling shares under Rule 144 effectively registers the shares. In other words, buyers of stock being sold subject to Rule 144 are not subject to any restrictions if they choose to resell.)

Which of the following is TRUE for exchange-traded funds (ETFs)? A. The SEC has classified them as mutual funds, and they have operating costs and expenses that are lower than most mutual funds. B. The SEC has classified them as a type of open-end fund, and they have operating costs and expenses that are higher than most mutual funds. C. The SEC has classified them as a type of open-end fund and they have operating costs and expenses that are lower than most mutual funds D. The SEC has classified them as mutual funds and they have operating costs and expenses that are higher than most mutual funds

C. (The SEC has classified exchange-traded funds as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds.)

A customer writes an MMM January 70 put at 6. The maximum potential gain on this position is A. $100 B. $600 C. $300 D. $760

D. (The potential gain on any short (written) option position, call or put, is the premium received on the transaction.)

All of the following are taxable to the investor EXCEPT A. semiannual interest payments B. cash dividends C. capital gains distributions D. stock dividends

D. (A stock dividend is payment of additional shares of the issuer to the stockholder rather than payment of cash. The price of the stock is adjusted so that the total value of the outstanding stock is the same before and after the dividend is paid. Stock dividends are thus not taxable.)

For registered shares held by an affiliate (known as control stock), which of the following applies? A. 6 month holding period, with sales allowed freely thereafter B. 6 month holding period with volume limits thereafter C. No holding period or any volume restrictions D. No holding period but volume limits always apply

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

Which of the following are available to participants in a 401(k) plan that are not available to IRA holders? I. Tax deferral on the earnings II. Hardship withdrawals III. The catch-up provision for those who are age 50 and older IV. Loans against the vested balance A. I and IV B. II and III C. I and III D. II and IV

D. (IRAs have no provisions for either hardship withdrawals or loans. Both IRAs and 401(k) plans offer tax deferral on the earnings, and although the amount is larger with the 401(k), they both offer the catch-up provision for those who are age 50 or older.)

Which of the following are considered money market securities at the time of issue? A. T notes B. Minicipal bonds C. T bonds D. T bills

D. (Money market securities are short-term (1 year or less) securities at the time of issue. Of the choices listed, only Treasury bills meet the short-term criteria at the time of issue.)

Notice filing for securities at the state level is for A. secondary offerings of equity securities only B. secondary offerings of debt securities only C. securities being issued in an initial public offering only D. securities that are deemed to be federally covered only

D. (Notice filing at the state level is for securities deemed to be federal covered. The state may require a notice be filed for these securities, such as those listed on national exchanges and those registered under the Investment Company Act of 1940, even though it has no jurisdiction over the registration requirements.)

Keynesian economic theory

The theory emphasizing that government spending and deficits can help the economy weather its normal ups and downs. Proponents of this theory advocate using the power of government to stimulate the economy when it is lagging.

T-bills (treasury bills)

short-term debt obligations the U.S. government sells to raise money

federal funds rate

the interest rate at which banks make overnight loans to one another