FINRA practice 3
A municipal finance professional (MFP) is A) an employee of a Financial Industry Regulatory Authority (FINRA) member engaged in municipal security representative activities such as underwriting and trading. B) employed by a municipality (not elected) to oversee the issuance of municipal bonds. C) an employee of the Municipal Securities Rule Board (MSRB) specializing in seeing that broker-dealers adhere to the MSRB rules and regulations regarding the sales of municipal bonds. D) an elected official of a municipality having some decision-making authority regarding who will underwrite the municipality's bonds.
A Explanation As per the Municipal Securities Rulemaking Board (MSRB), a municipal finance professional (MFP) is an associated person of a member firm who is primarily engaged in municipal securities representative activities, including underwriting, sales and trading, or any other activity that involves communications with the public regarding municipals.
An associated person of a Financial Industry Regulatory Authority (FINRA) member firm would not be considered a municipal finance professional (MFP) if involved solely in which of the following? A) Municipal securities sales to customers B) Underwriting municipal securities for the firm C) Municipal securities communications with customers D) Research involving municipal securities for the firm
A Explanation Associated persons whose activities are limited solely to sales or have only clerical or ministerial functions are not MFPs. All the other activities would be associated with an MFP.
A broker-dealer firm managing an initial public offering (IPO) wishes to give a gift to an associated person of one of the selling group members. Which of the following would be an unacceptable gift under the rules? A) A $125 designer edition fountain pen and desk holder B) A ticket to a major league ball game to attend with a principal of the broker-dealer C) A $150 leather briefcase with the broker-dealer's name and logo on it D) A dinner at an expensive restaurant with a representative of the broker-dealer
A Explanation Financial Industry Regulatory Authority (FINRA) member firms may not give business-related compensation to associated persons of other firms - compensation directly tied to sales or promises of sales - but may give an individual gifts whose value does not exceed $100 in a 12-month period. Tickets to a sporting event or dinner at an expensive restaurant may exceed the $100 limit if it is occasional, someone from the rewarding firm is present, and the employing firm has given its permission. Reminder advertising, items with the broker-dealer's name and/or logo, may also exceed the $100 limit, within reason, because it has a business purpose.
Which of the following are potential benefits associated with a real estate direct participation program? A) Tax deductions and credits B) Dividends and interest C) Depletion allowances D) Intangible costs
A Explanation 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.
Income from an investment in debt securities is known as A) interest. B) total return. C) dividends. D) capital gains.
A Explanation Income from debt securities is known as interest. Income from common stock is known as dividends.
BBB Corporation is liquidating under a Chapter 7 bankruptcy. What is the order of payout? A) Secured, not Senior bond holders, general creditors, preferred stock holders, and common shareholders B) General creditors, senior bond holders, preferred shareholders, and common shareholders C) Common shareholders, preferred shareholders, general creditors, and senior bond holders D) Senior bond holders, preferred shareholders, common shareholders, and general creditors
A Explanation The corporation's secured bondholders get paid first in bankruptcy. Next come the debentures and general creditors. The preferred holders are senior to the common, making them third in line and the common holders are the most junior, making them the last to be paid out.
An investor purchases 1 KLP October 95 put at 6.50. What is the investor's maximum potential gain with this position? A) $8,850 B) $10,150 C) $9,500 D) $9,650
A Explanation The maximum gain on a long put subtract premium from the strike price (95 − 6.50 = 88.50 per share). Because one contract represents 100 shares, the owner's maximum gain is $8,850 and would occur if the stock falls to zero. Remember, put buyers are bearish; therefore, they will make money if the stock falls below the breakeven point—in this case, below 88.50.
Which of the following are true of both qualified plans and nonqualified plans? A) The accounts grow tax deferred. B) Tax on interest and dividends are deferred but not capital gains. C) Contributions are tax deductible. D) Contributions are not tax deductible.
A Explanation With qualified plans deposits go in before taxes and grow tax deferred; all withdrawals are taxable. With nonqualified plans deposits are made after taxes and distributions above the cost basis are taxable.
A prospectus must be delivered to customers following a transaction in all of the following except A) ETFs. B) follow-on offering of common stock by a public reporting company. C) mutual funds. D) unit investment trust.
A no requirement to send one to ETF Publicly traded closed-end funds are not obligated to deliver a prospectus when traded in the secondary market place.
The MSCI-EAFE Index tracks which of the following? A) Foreign equities B) Municipal bonds C) Mid-cap stocks D) Corporate bonds
A Maintained by MSCI Inc., the Europe, Australasia, and Far East (EAFE)
It would be expected that a repurchase (repo) agreement contract would include A) the repurchase price and the maturity date. B) the rate of return and maturity date. C) the repurchase price and the rate of return. D) the maturity date only.
A (Maturity is the day the sale would reverse) Return would change, can't be on there Explanation A repurchase (repo) agreement contract would include the repurchase price (the price that the securities initially sold would be bought back at) and the maturity date (the date that the initial sale would be reversed). The return would be the difference between the initial sale price and the repurchase price.
The rules to prevent pay to play regarding contributions made to political parties, candidates, and elected officials by firms involved in the underwriting or sales of municipal securities are enforced by A) Financial Industry Regulatory Authority (FINRA). B) Securities and Exchange Commission (SEC). C) Municipal Securities Rule Board (MSRB). D) Federal Reserve Board (FRB).
A (Men relies on Females for love) Municipal no power, use FINRA to enforce
The performance of listed options contracts is guaranteed by which of the following? A) Options Clearing Corporation (OCC) B) U.S. Treasury C) Securities and Exchange Commission (SEC) D) Federal Reserve Board (FRB)
A (Options guaranteed by options) Explanation The OCC guarantees the performance of listed option contracts.
A customer of your broker-dealer has invested in a variable annuity (VA). She makes several comments about them, but one of the statements is inaccurate and needs to be corrected. Which is it? A) VAs are not securities. B) Premiums are invested in a diversified portfolio with an investment objective that the purchaser gets to choose. C) VAs guarantee an income stream for life. D) VAs are actually insurance company products.
A (VA are securities) Explanation All annuity contracts guarantee an income stream for life, but there is an investment component to a VA that makes it different from a fixed annuity. These insurance company products invest in diversified portfolios offering a number of objectives for the investor to choose from. Investment in the diversified portfolio (a.k.a. the separate account) means that the investor is assuming the investment risk. This is the definition of a security.
Your client Soren buys a 4% XYZ Corporate bond. If his current yield is 5% he bought the bond at A) a discount. B) above par. C) a premium. D) par.
A (discount = higher CY than Coupon)
A corporate bond ($1,000 PAR) purchased several years ago at $825 matures. At maturity, the bondholder will receive principal in what amount? A) $1,000 face value B) An amount to be calculated based on the current yield at the time of maturity C) $825 representing return of the purchase price D) $175 representing the difference between the purchase price and PAR
A (face value) Explanation At maturity, the holder of a corporate bond receives the last interest payment due representing six months' interest, plus the principal. The amount of the payment representing principal will be the PAR or face value.
To facilitate a public offering where securities are offered and sold to the investing public, issuers will utilize the services of all of the following except A) U.S. stock exchanges. B) underwriters. C) broker-dealers. D) investment bankers.
A (service of individuals NOT platforms) Explanation To facilitate a public offering, issuers will utilize the services of investment bankers and broker-dealers known as underwriters of the securities.
Restricted shares, those that are unregistered, meaning that they were not attained in a public offering, may be sold by a nonaffiliate A) after holding them for six months and freely thereafter. B) at any time but with volume restrictions. C) after holding them for six months but then subject to volume restrictions. D) freely, with no holding period or volume restrictions.
A (unaffiliated with club, holding period) Explanation Nonaffiliates holding unregistered shares must wait six months before divesting of those shares, but because they are nonaffiliates, they may sell freely (without volume restrictions) thereafter.
A final prospectus must include certain information. Which of the following is not required to be included? A) The underwriting contract and a list of all underwriters named in the contract B) A history of the business including any risks to purchasers that might be unique to that business or industry C) A statement by the SEC that the offering is neither approved or disapproved D) The intended use of the proceeds for such corporate actions including expansion, mergers, or acquisitions
A (underwriting contract not required) Explanation While a description of the underwriting is required (this would include a list of the underwriters provided in the preliminary prospectus) the actual underwriting contract is not required in a final prospectus.
Which of the following statements regarding open-end and closed-end funds is true? A) Both issue full and fractional shares. B) Both pay dividends when declared. C) Both are priced using the same method. D) Both issue equity and debt securities.
B Both open- and closed-end funds can pay dividends to shareholders when declared by the fund's board of directors. Only open-end funds can issue fractional shares Only closed-end funds can issue debt securities. Open-end fund shares are priced by formula (NAV + sales charge = POP) closed-end fund shares are priced by supply and demand.
Associated persons or registered representatives who want to work outside of their existing employment with their current broker-dealer may do so if they provide prior written notice to the member. In which of the following would notice not be required? A) Ownership equaling 5% interest in another financial services company is intended to be made. B) They will be involved in extensive fundraising activities for a charitable institution. C) The amount of total compensation expected from the outside employer is less than $7,500 per year. D) They intend to serve only in the capacity of a director of another company with no compensation.
B Explanation If a registered person wants to be employed by or accept compensation from an entity other than the member firm, that person must provide prior written notice to the member. These affiliations would include serving as an officer or director of a company or owning any interest in another financial services company.
Which of the flowing is true regarding short sales? A) Selling short means selling less shares than were purchased. B) Selling short involves selling shares not yet owned. C) Selling shares not yet owned is prohibited. D) Selling short involves purchasing the shares first.
B Explanation Short sales involve selling shares not yet owned. This is permitted. When selling short, investors are borrowing the shares to be sold, which must be replaced later by buying them. Investors who sell short are bearish, hoping the shares go down in value so that they can be purchased later at a lower price than they were initially sold for.
The regulatory element of training requires that all registered persons complete a computer-based training session how frequently? A) Within 90 days of the person's second registration anniversary and then every 3 years thereafter B) Within 120 days of the person's second registration anniversary and then every 3 years thereafter C) Within 120 days of the person's third registration anniversary and then every 2 years thereafter D) Within 90 days of the person's third registration anniversary and then every 2 years thereafter
B Explanation The regulatory element of training requires that all registered persons complete a computer-based training session within 120 days of the person's second registration anniversary and every three years thereafter (i.e., within 120 days of the person's 2nd, 5th, 8th, 11th registration anniversary, and so on).
A client has just purchased a ZZZ June 35 call at eight when the stock is trading at 41. What is the contact's premium? A) Eight points of intrinsic value B) Six points of intrinsic value and two points of time value C) Eight points of time value D) Two points of intrinsic value and six points of time value
B intrinsic value= how much it is in the money (41-35=6) The extra two points paid in premium are time value.
Financial markets encompass A) stocks and bonds only. B) equity, debt, currency, and derivative products. C) derivative products such as options only. D) equity, debt, currency, but not derivative products.
B (all of the above) Explanation A number of different assets such as equities (stocks), bonds, currencies, and derivative products such as options can be offered and traded in the financial markets. Stocks and bonds are each examples of equity and debt instruments, respectfully.
Selling shares not yet borrowed or located to be borrowed is A) known as closing a position with a sale and is prohibited. B) known as a naked short sale and is prohibited. C) known as a short sale and is prohibited. D) known as closing a short sale with a purchase.
B (naked, unfound) Explanation In order to open a position with a short sale, the shares to be sold must be borrowed or located to be borrowed first. Not doing so is known as selling short naked (naked short sale) and is prohibited.
A small company, in order to raise capital for expansion, wants to sell shares of stock to investors. The company has never offered ownership outside the founding partners to new investors before. This offering is known as A) an additional public offering (APO). B) an initial public offering (IPO). C) a combination offering. D) a subsequent public offering (SPO).
B (never offered before; initial) Explanation The first time an issuer distributes securities to the public, it is called an initial public offering (IPO). Because the issuer (the company) receives the proceeds from the investors who are investing in the company, all IPOs are primary issuer transactions.
An investor has purchased a senior, unsecured debt security that trades on an exchange and is issued by a financial institution. It is backed only by that institution's good faith and credit. The security tracks the performance of a particular market index, but does not represent ownership in a pool of securities the way share ownership in a mutual fund does. This security that pays no interest and has a stated maturity date is known as A) a call option or put option contract. B) an exchange-traded note. C) a real estate investment trust. D) an exchange-traded fund.
B (senior take notes, stated maturity Grad date, no protection from the principal) Explanation Exchange-traded notes (ETNs) are senior, unsecured debt securities issued by a bank or financial institution. Therefore, they are backed only by the good faith and credit of the issuer. The notes track the performance of a particular market index, but do not represent ownership in a pool of securities the way share ownership of a fund does. While ETNs are bond-like instruments with a stated maturity date, they do not pay interest and offer no principal protection.
A shelf registration A) is good for three years and requires a prospectus to be filed only once. B) is good for two years and requires a supplemental prospectus be filed before each sale. C) is good for four years and requires a supplemental prospectus be filed before each sale. D) is good for four years and requires a prospectus to be filed only once.
B (two shelfs top and bottom) (stocked before each sale) Explanation Once filed, a shelf registration is good for two years and allows the issuer to sell portions of a registered shelf offering over the two-year period without having to reregister the security. However, a supplemental prospectus must be filed with the SEC before each sale. A well-known seasoned issuer (WKSI) may have a three year period.
Investors in hedge funds should know that the funds are A) highly regulated, which is why there are no laws needed for investors to be accredited. B) unregulated but must abide by laws that investors be accredited. C) highly regulated, including having to abide by laws that investors be accredited. D) unregulated and, therefore, have no requirements for those who invest in them.
B (unkept hedge, but still LAWS)
A registered representative is opening a new account for a senior citizen age 68. The registered representative must A) set up an interview between the customer and a principal of the firm to exercise due diligence before the account can be opened. B) require medical documentation showing the customer is capable of making decisions before the account can be opened. C) make a reasonable effort to obtain the name and contact information for a trusted contact person. D) have the name and contact information of a trusted contact person before the account can be opened.
C Explanation When opening a new account or updating account information for a senior citizen firms must make a reasonable effort to obtain the name and contact information for a trusted contact person. It should be noted that if the customer refuses to tender such a name the account can still be opened.
Regarding a public offering and a private placement, all of the following are true except A) both may utilize the services of investment bankers to facilitate the sale of securities. B) both allow securities to be sold to individual and institutional investors. C) both are subject to the registration requirements found in the Securities Act of 1933. D) both are methods of offering securities for sale to investors.
C Explanation A key difference is that private placements are generally exempt from the registration requirements of the Securities Act of 1933. They are similar in that both public offerings and private placements are methods utilizing the services of investment bankers (underwriters) to offer securities to the public and with each, securities can be sold to individuals, but the number of individual investors is limited with private placements.
Your client, Harry Swenson, is very frugal. He feels like mutual funds have too many expenses and he doesn't believe that over a long period the active management of investment advisors can outperform their respective benchmarks, but he likes the idea of a pooled investment in the stock market rather than picking individual stocks on his own. Which of the following types of investments should you recommend? A) An open end fund B) An exchange-traded note (ETN) C) An exchange-traded fund (ETF) D) A closed end fund
C Explanation Both open end and close end funds have active management ETNs are a debt investment, not an equity investment. ETFs meet all of Swenson's criteria.
Which of the following would be associated with loans made to member banks of the Federal Reserve? A) Prime rate B) Call loan rate C) Discount rate D) Margin rate
C Explanation Loans made to member banks of the Federal Reserve are made by the Federal Reserve Board (FRB) at the discount rate. The call loan rate and the prime rate are rates at which banks lend to broker-dealers and corporate customers, respectively. Although margin is controlled by the FRB, it has no bearing on this question.
Which of the following are considered money market securities at the time of issue? A) Municipal bonds B) T-bonds C) T-bills D) T-notes
C Explanation Money market securities are short-term (one 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.
Portfolio diversifying might be used to reduce which of the following risks? A) Interest-rate risk B) Market risk C) Business risk D) Inflation risk
C Explanation Nonsystematic risks can be reduced using diversification. These would include business, financial, credit, and liquidity risk (among others). Market, inflation, and interest-rate risks are types of systematic risks that are considered nondiversifiable because they impact all investments and, therefore, cannot be diversified away or mitigated simply by diversifying.
A firm designated as self-clearing can act in a back-office capacity for an introducing firm. not act in a back-office capacity for an introducing firm. clear and settle transactions executed by other firms. only clear transactions it executed. A) II and III B) I and IV C) I and III D) II and IV
C Explanation Self-clearing firms not only clear and settle their own executions (transactions) but can clear the executions of other firms that would be considered introducing or fully disclosed firms. In this light, fully disclosed firms are those that introduce their business to clearing firms. Clearing and settling transactions includes providing any back-office functions needed.
Mr. Jackson bought 100 shares of XYZ two years ago at $10 per share. The stock paid a $.50 dividend each year and he sold the stock for $11. What percent was his total return? A) 15% B) 5% C) 20% D) 10%
C Explanation The formula for total return is dividends plus capital gains divided by amount invested.
All of the following are considered money market instruments except A) negotiable jumbo certificates of deposit (CD). B) commercial paper. C) American depositary receipts (ADRs). D) banker's acceptances (BAs).
C ADRs are equity securities. Banker's acceptances (BAs) and commercial paper both have maximum maturities of 270 days; most negotiable jumbo certificates of deposit (CD) mature in one year or less.
A diversified growth fund charging 0.4% of net assets per year as a 12b-1 fee may not make which of the following statements? A) The fund will pay its investment adviser a specified percentage of funds under management. B) The fund will have a diversified portfolio with a stated investment objective. C) The fund is a no-load fund. D) The fund will have a calculated fully disclosed expense ratio.
C (.4% is greater than .25%) Explanation The fund would be expected and required to make statements regarding its diversification status, its expense ratio, and the rate at which it pays its adviser. It definitely may not, however, claim to be a no-load fund if it charges a 12b-1 fee, fees charged to market the fund's shares, of more than 0.25% of net assets.
According to economists which of the following is the correct characterization of the money supply? A) M1 plus M2 equals M3. B) M2 equals M1 plus M3. C) M3 includes all of M1 and M2. D) M1 includes all of M2 and M3.
C (3 brothers bust include 1 and 2) Explanation M3 includes all of M1 and M2, plus time deposits of more than $100,000 and repurchase agreements with terms longer than one day. In this light, M3 is that measure of the money supply that is the most inclusive.
A broker-dealer wants to give an employee of another firm a gift. This is permitted provided all of the following conditions are met except A) the gift or compensation has the employing member firm's prior approval. B) the gift or compensation is not conditional on sales. C) the gift or compensation is preapproved by the firm's self-regulatory organization (SRO). D) the gift or compensation doesn't exceed the annual $100 limit.
C (EXCEPT) Explanation Firms may not distribute gifts, gratuities, or compensation to the employees of other member firms unless the compensation is not conditional on sales or promises of sales, it has the employing member's prior approval, and the compensation's total value does not exceed the annual limit of $100 per person. Approval of the self-regulatory body the firm reports to is not a requirement or condition.
Hedge funds attempt to A) achieve modest returns and are, therefore, associated with being low-risk investments. B) mitigate all risks making them suitable for most investors. C) achieve high returns and are, therefore, associated with high-risk investments. D) mitigate all risk using hedging as an investment strategy.
C (Hedges are high) Explanation While hedging is the practice of attempting to limit or mitigate risk, most hedge funds specify generating high returns as their primary investment objective. In attempting to achieve these returns, they tend to entail a substantial amount of risk for those who own shares.
All of the following information is required to be provided on the Form U-4 except A) disclosure of criminal arrests and charges. B) 10-year employment history (including full- time education). C) education (degrees or designations). D) 5-year residency history.
C (No requirement for designations/degrees) Explanation Although there is a place to disclose certain earned professional designations such as CPA and CFA, there is no requirement to disclose education (degrees or designations). Time spent as a full-time student however would be included in the 10-year employment history.
An affiliate of a corporation has purchased shares of restricted securities (fully paid for) in a private placement. Under Rule 144 the affiliate can A) sell shares immediately with no restrictions. B) sell shares immediately but is subject to volume restrictions. C) sell shares after a six-month holding period but is subject to volume restrictions. D) not divest of the shares until the affiliation with the issuer ceases.
C (affiliates always have restrictions, restricted must wait) Explanation In accordance with Rule 144 affiliates of a corporation who are in possession of fully paid for restricted shares must wait six months before selling those shares. They must abide by the volume restrictions mandated by Rule 144 for as long as they are affiliates.
The U.S. federal government is the nation's A) largest borrower and therefore considered least safe credit risk. B) smallest borrower and therefore considered best credit risk. C) largest borrower and considered the best credit risk. D) smallest borrower and considered least safe credit risk.
C (biggest best bank) Explanation The federal government is the nation's largest borrower, as well as the best credit risk. Securities issued by the U.S. government are backed by its full faith and credit. There is no stronger backing than that of the U.S. federal government.
Treasury bills (T-bills) are A) issued at a discount, with a stated interest rate paid annually. B) issued at face value, with all interest paid in monthly checks. C) issued at a discount to par, paying interest at maturity. D) issued at face value, with a stated rate of return received as interest annually.
C (can't be annual, they mature before then) Explanation T-bills, the shortest-term government-issued securities, are not issued with a stated rate of return. Instead they are issued at a discount to par rather than face value, and they mature at par. The difference between the discounted price paid and the par value received at maturity is considered the interest.
A hedge fund portfolio has been characterized as being highly leveraged. This means that A) there are substantial investments in international markets. B) commodities and currencies are included in the portfolio. C) there is substantial borrowing or purchasing on margin. D) derivative products such as options are utilized.
C (leverage means to borrow, borrow to purchase means buying on margin) Explanation While hedge funds can employ all these investment types and strategies, being highly leveraged means borrowing to purchase. Borrowing to purchase securities is typically known as buying on margin.
Regarding municipal general obligation (GO) bonds, which of the following is true? A) The higher the statutory debt limit, the less risk of excessive borrowing by the municipality. B) The higher the statutory debt limit, the safer for bondholders. C) The lower the statutory debt limit, the safer for bondholders. D) The lower the statutory debt limit, the higher the risk will be for bondholders.
C (lower is less risk) Explanation Municipal debt limits, known as statutory debt limits, can make a bond safer for investors. These limit the amounts of debt that the municipality can incur. The lower the debt limit, the less risk of excessive borrowing and default by the municipality, and thus the issuer's securities are safer for investors.
A customer recently approved to trade options buys a put contract for the account's initial transaction. If the customer fails to return the signed option agreement within 15 days of account approval, which of the following transactions is the customer permitted to make? A) Opening purchase B) Opening sale C) Closing sale D) Closing purchase
C (opened with a buy, must close with a sale) Explanation If a customer fails to return the signed option agreement within 15 calendar days of account approval, the customer is permitted to do closing transactions only. Because the customer opened a position by buying, the only transaction permitted would be a closing sale.
A corporation deposits T-bonds it owns into a trust in order to secure a loan. The loan for this type of arrangement would be facilitated by the corporation issuing A) mortgage bonds. B) equipment trust certificates. C) collateral trust bonds. D) treasury guaranteed bonds.
C (secure the loan with collateral) Explanation When issuing collateral trust bonds or certificates, an issuing corporation deposits marketable securities it owns into a trust in order to secure the loan. The securities it deposits can be securities in other corporations or those of partially or fully owned subsidiaries as long as the securities are marketable. The securities become the lender's (bondholder's) collateral.
An issuer files a registration statement with the SEC for the sale of new securities on May 1. While reviewing the registration statement, the SEC determines that it has not been filed properly and issues a deficiency letter on May 5. The issuer submits a corrected registration statement on May 8. Which of the following is true regarding the 20-day cooling-off period? A) It continues and is not impacted by the issuance of the deficiency letter by the SE. B) It is halted on the day the deficiency letter is issued and must begin anew from that same date once the corrected registration is received. C) It is halted on the day the deficiency letter is issued and resumes where it left off on the day the corrected registration is received. D) It is halted and does not resume until 20 days following the corrected registration is received.
C (wait until fixed, then resumes) Explanation When a deficiency letter is issued by the SEC to an issuer, the 20-day cooling-off period is halted. It resumes where it left off when the corrected registration statement is filed. In other words, the days that the cooling-off period are suspended do not count toward the 20 days.
All FINRA firms must have business continuity plans. Those plans must include all of the following except A) data backup and recovery capability. B) prompt customer access to funds and securities if the firm is unable to continue business. C) the name of two emergency contact persons who are principals and members of senior management. D) a designated principal and member of senior management to conduct a quarterly review and update of the plan.
D ANNUAL NOT quarterly
One of your new clients explains that she prefers investments paying income with a fixed rate of return, but also allows for the possibility of realizing greater gain potential. She would likely favor investments in A) corporate bonds. B) common shares. C) adjustable rate preferred shares. D) convertible preferred shares.
D Convertible preferred shares allow the owner to exchange the shares for a fixed number of shares of the issuing corporation's common stock. Common shares enjoy a greater gain potential than preferred shares.
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 customer must give specific instructions to cancel the order so that it will not continue as a good working order. B) The order will be automatically renewed. C) The order will only continue working through the opening of the next business day. D) The order will be automatically canceled.
D Explanation 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 cancelation.
Associated persons who wish to enter into a private securities transaction for which they will receive no compensation must A) open a new account to accommodate the transaction immediately. B) take steps to have the transaction supervised at the firm where it will occur. C) await the employer's approval before proceeding. D) provide prior written notice to their employer.
D Explanation Associated persons who wish to enter into a private securities transaction must provide prior written notice to their employer. Approval is only required when compensation will be paid. All supervision for the transaction is the responsibility of the employing member and not the firm accommodating the transaction.
Common stockholders owning dividend paying stocks are exposed to A) current income risk but not market risk. B) market risk but not current income risk. C) neither market risk nor current income risk. D) market risk and current income risk.
D Explanation In owning common shares, the investor stands to lose current income through dividend reduction or suspension (current income risk), as well as capital loss, should the market price decline (market risk).
Each of the following activities would require prior written notification by an associated person to the employing broker-dealer except A) part-time work parking cars on the weekend at a local racetrack. B) offering to sell a limited partnership interest in an oil and gas drilling program. C) acting as a real estate sales agent, limited to the sales of individual homes only. D) becoming a limited partner in an oil and gas drilling program.
D Explanation Passive investments, such as the purchase of a limited partnership interest, are not considered outside business activity. An associated person may make a passive investment for his own account without providing written notice to the employing broker-dealer.
Regarding the issuance of new securities to the public, which of the following is true? A) Underwriters are permitted to accept orders for securities during the Securities and Exchange Commission (SEC) review period. B) Registrations become effective within 10 business days of Securities and Exchange Commission (SEC) filing. C) The Securities and Exchange Commission (SEC) review of a new issues filing must always be longer than 20 days. D) The Securities Act of 1933 provides criminal penalties for fraud.
D Explanation The Securities Act of 1933, which provides for criminal penalties for fraud in the issuance of new securities, ensures that investors are fully informed about a security and its issuer when the security is offered to the public.
A measure of a nation's citizen's economic activity is A) gross domestic product. B) Consumer Price Index. C) S&P 500 Index. D) gross national product.
D Explanation The gross national output is a measure of only the economic output of a country's citizens and companies, regardless of location. The gross domestic product measures all the output only within a nation's borders.
An investor opens an account with BNZ Government Securities, a broker-dealer limiting its transactions exclusively to securities issued by the U.S. government. The account holds $250,000 of Treasury bonds, $250,000 of Treasury notes, and $50,000 in cash. If BNZ's broker-dealer business should fail, the investor would receive Securities Investor Protection Corporation (SIPC) protection in the amount of A) all of the securities and all of the cash, because U.S. government securities do not go bankrupt. B) $50,000 of the cash and $450,000 of the securities. C) $500,000 of the securities and none of the cash. D) $0.
D Explanation those who deal exclusively in U.S. government securities are exempt from SIPC.
Which of the following best describes how a market order to sell would fill if placed when the price of the stock is a 40? A) The next available price above 40 B) Only at 40 C) The next available price below 40 D) The next available price
D Market order always get the next available price regardless of if it is a buy or sell and regardless of price.
Which of the following orders can be used to close a short position in CDT stock that consists of 1,000 shares? A) Buy 10 CDT call options B) Write 10 CDT call options C) Sell 1,000 shares of CDT D) Buy 1,000 shares of CDT
D (Buy in order to close a short) (BUY SHORTS CLOTHES) Explanation To close a short position consisting of 1,000 shares of CDT stock, one would need to purchase 1,000 shares—buy 1,000 shares of CDT. Buying the call options would not close the position, but once owned, they could be exercised with the purchased shares then used to close the short position.
Which of the following best describes how a buy stop at 39 would fill? A) The next price above 39 after the market price rises to 39 B) The next available price after the market price falls to 39 C) The next price below 39 after the market price falls to 39 D) The next available price after the market price rises to 39
D (Buy-bread-available-rises) A buy stop order becomes a market order and fills at the next available price once it touches or passes through the stop price.
All of the following are true regarding breakpoints for mutual funds except A) breakpoints must be disclosed to potential investors. B) a breakpoint sale is considered to be a sale just below a breakpoint. C) the greater the investment, the lower the sales charge. D) the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold.
D (EXCEPT) $$$$$ Explanation There is no standardized industry mandated breakpoint schedule. the greater the investment, the lower the sales charge will be. A breakpoint sale occurs when a sale is made just below a breakpoint with the intent of the registered representative to be the recipient of a higher sales commission. In this light, disclosure of breakpoints when they are offered is required.
Which of the following is the largest self-regulating organization (SRO)? A) SEC B) MSRB C) CBOE D) FINRA
D (Largest acronym) Explanation All broker-dealers in the United States who deal in corporate securities are required to be members of FINRA. The SEC has jurisdiction over all securities business in the United States, but it is not an SRO.
A corporate bond has a stated yield set at the time of issuance. This stated yield is also known as A) the current yield. B) the yield to maturity. C) the yield to call. D) the nominal yield.
D (Nominal or coupon or stated) Explanation The stated yield set at the time of issuance is also known as the nominal or coupon yield.
It would be appropriate to refer to any of the following as an issuer transaction except A) an APO. B) an IPO. C) an SPO. D) an REPO.
D (REPO is buyer and seller, not just issuer) APOs (additional public offerings), IPOs (initial public offerings), and SPOs (subsequent public offerings) all result in funds going to the issuer. A repo (repurchase agreement) is a money market instrument where the money changes hands between the buyer and the seller.
A registered options principal (ROP) at your broker-dealer has just approved an options account for one of your new clients. How long does the client have to return the signed options agreement? A) Not later than the end of the month in which the account was approved B) 5 days C) 30 days D) 15 days
D (approving is half the battle, half of 30 is 15)
A basis point is valued at A) 1% of market value. B) 1/1000th of 1%. C) 1% of face value or $10. D) 1/100th of 1%.
D (basically 100%) POINT WOULD BE 1% of $10 Explanation A basis point is a measurement of yield equal to 1/100 of 1%. A full percentage point is made up of 100 basis points (bps). A point is a measurement of the change in a bond's price which equals 1% of face value or $10 per bond.
For a fully disclosed firm, which of the following is true? A) It can accept checks from customers made out to fully disclosed form or the clearing firm. B) It can hold funds and securities for a customer. C) It can clear transactions (accept cash and securities for delivery) for its customers. D) It can execute both buy and sell orders for a customer.
D (fully able to execute) Fully disclosed firms (introducing BDs) introduce their customer's business to clearing firms. clearing firm acts as custodian for the customers of the introducing BD, holding their assets.
All of the following are key differences between general obligation (GO) bonds and revenue bonds except A) the source of interest and principal payments. B) being subject to statutory debt limits. C) the requirement for voter approval. D) the type of issuer borrowing the funds.
D (issuer is the only common) Both are municipal bonds, issued by municipalities Explanation Of the answer choices listed, the only one common to both GO and revenue bonds is the issuer. GO bond interest and principal payments are backed by taxes while revenue bond interest and principal payments are backed by the revenues generated by the project the bonds funded. Only GO bonds are subject to statutory debt limits and require voter approval.
Subject to market liquidity, which of the following orders is most likely to be executed immediately? A) Fill-or-kill order B) All-or-none (AON) order C) Limit order D) Market order
D (market liquid) Explanation When a liquid market exists, buy or sell market orders are executed at the best available price immediately.
During the cooling-off period, underwriters may A) distribute sales literature to interested existing clients B) take orders from institutional investors only C) accept binding indications of interest from public investors D) take nonbinding indications of interest from public investors
D (no such thing as a binding indication) Explanation While taking indications of interest is permitted during the cooling-off period, taking orders from anyone, or making bona fide offers of sale and distributing sales literature is not. There is no binding indication of interest.
Regarding a tombstone advertisement, all of the following are accurate statements except A) they are limited to the information that may be contained in them. B) all such advertisements must contain an advisory stating that the ad is neither an offer to sell nor a solicitation of an offer. C) it is the only type of advertisement permitted between the time the registration statement is filed with the SEC and the effective date. D) they are required by and filed with the SEC in order to announce a new issue to the investing public.
D (not required to file ad) Explanation While tombstone ads are the only type of advertisement that may run to announce a new issue during the cooling-off period, they are not required and do not need to be filed with the SEC. When they are used, they are neither an offer to sell nor a solicitation of an offer and must state so and are limited to the information that may be contained in them.
An investor has purchase a bond where the issuer will repay part of the bond's principal before the final maturity date, and then pay off the major portion of the debt principal at final maturity. This is A) a series maturity schedule. B) a serial maturity schedule. C) a term maturity schedule. D) a balloon maturity schedule.
D (one final major push) Explanation This is the definition of a balloon maturity schedule. The other two types of debt maturity schedules are term and serial. There is no series maturity schedule.
Which risks are Nonsystematic? Business Market Liquidity Inflation Interest-rate financial credit Which are systematic?
Non: business, financial, credit, and liquidity risk Systematic: Market, inflation, and interest-rate risks
