General SIE Review

An investor buys 100 shares of STP stock for $65 per share and later sells an STP 68 call for 1.50 when the market price of STP is $64. Which two of the following are TRUE? I. The investor's breakeven is 63.50 II. The investor's breakeven is 66.50 III. The investor's maximum loss is $6,350 IV. The investor's maximum gain is $6,650

1 & III -- This investor has written a covered call to generate additional income on stock that is already owned, and provide protection for the stock position equal to the amount of the premium. Because the investor earned money on the premium, the stock price can decline by the amount of the premium for the breakeven. BE = 65 - 1.50 or 63.50. The gain on the stock is limited to 3 per share (the short call obligates the investor to sell stock at the strike price of 68) + the premium received or $450. The investor can lose the full downside of the stock less the premium or 65 - 1.50 x 100 shares = $6,350.

Martin opens his first Roth IRA on March 31, 2014, at age 56. What is the first date on which he can take a qualified distribution that is tax-free?

1-Jan-19 -- Qualified distributions are available after meeting 2 criteria. 1) Five years after the first contribution (which is deemed to occur on Jan 1 of that year) and 2) after the account holder's 59½ birthday. In this case, five years after the first contribution is January 1, 2019 (Jan 1 2014 is year 1 and Dec 31, 2018 is the end of year 5. In 2019 Martin is also older than 59½.

A standby underwriting is used A) for a company going public for the first time B) in a rights offering C) in a secondary offering D) in a best-efforts underwriting

A

Clearing member firms that have been assigned exercise notice by the OCC, assign to their customers in what manner? A) Random or FIFO only B) Random, FIFO or LIFO C) Random only D) Random or LIFO only

A

If Standard & Poor's assigns an AAA rating to a foreign country, what rating will it usually give to the foreign country's sovereign bonds? A) AAA B) Each bond will be separately rated on its own merits, and ratings could vary. C) It cannot be determined because there is no relationship between a country's rating and ratings on its sovereign bonds. D) One rating below AAA

A

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

A

When explaining the features of a limited partnership interest to a prospective customer, a registered representative must explain that A) The liquidity of the partnership interest may be very limited B) Limited partners will have the opportunity to vote regularly on management strategy for the partnership C) The value of that partnership interest will vary daily based on market valuation determined by exchange trading D) The tax benefits of the partnership are the primary reason to invest

A

Which of the following businesses may offer a SIMPLE IRA to its employees? A) An education company with 75 employees B) A social media company with outlets in the US and abroad C) A small law firm with 50 partners and a team of associated individuals D) An industrial company employing over 1,000 people

A -- A SIMPLE IRA is a type of company sponsored retirement plan which provides tax deferred benefits to its employees. One of the major requirements is that the plan is only available to companies with a maximum of 100 employees.

Competitive bids provide issuers with all of the following benefits EXCEPT A) higher dollar amount raised B) avoids the appearance of impropriety C) lower fees D) lower borrowing costs

A -- A competitive bidding process has all of the benefits listed except a higher capital raise. The process fosters competition among underwriters, thereby driving down gross spread as well as coupon.

How does a corporation indicate who is authorized to trade for a corporate brokerage account? A) Through a resolution of the board of directors B) Through a limited power-of-attorney C) Through an amendment to its charter D) Through a designated, standing power-of-attorney

A -- A corporation passes a resolution of the board of directors to set up a brokerage account. The resolution specifies who will have trading authority for the account.

All of the following would likely cause a share of a REIT to trade at a discount EXCEPT A) A reduction in vacancy rates B) A decrease in demand for new space C) A decline in property values D) A decrease in the demand for the shares of the REIT

A -- A reduction in vacancy rates means that there is a lower supply of available buildings. When the supply is reduced, there is greater demand, which drives the price up. A reduction in vacancy rates would be likely to cause the share of a REIT to trade at a premium. Declining demand for space, declining property values, and decreasing demand for REIT shares would all be likely to cause REIT shares to trade at a discount.

A stop order is entered as "Sell 250 shares stop at $53.70." If the order remains unfilled, then A) the market price must be above $53.70. B) the market price must be below $53.70. C) the order will convert on the next business day. D) the order has been converted.

A -- A stop order becomes a market order when the stop price (or better) is hit. If this sell order hasn't become a market order and filled, the market price is above the stop price.

Which of the following best describes a tender offer? A) An offer by an issuer or shareholder to investors to purchase a certain number of their shares at a specific price, during a specified time period. B) An institutional investor has notified the company that it will be liquidating a significant number of its shares during the next two weeks. C) An issuer has filed a registration statement with the SEC to issue new stock to the public. D) An offer by a mutual fund to purchase a block of the issuer's shares in an upcoming follow-on offering.

A -- A tender offer is an offer made to company shareholders to purchase a certain amount of their stock at a specified price, usually a premium to the current market price of those shares. The goal is for one party to gain additional control of the company's shares, and ultimately, of corporate decision making.

A trust may be overturned due to: A) Undue influence B) Broker-dealer petition C) Cease and desist order D) Beneficiary petition

A -- A trust may be overturned due to undue influence (the individual signing the trust documents was coerced), or lack of capacity (the individual was mentally incompetent).

Who is the issuer of a banker's acceptance? A) A borrower with a bank deposit account B) The Depository Trust Corp. C) The FDIC D) A commercial bank

A -- BAs are issued by borrowers, typically companies, and guaranteed (accepted as an obligation) by a commercial bank. Technically, they are time drafts drawn on deposit accounts at banks. The deposit accounts serve as the bank's collateral.

Which of the following orders must be adjusted accordingly on the ex-dividend date? A) "Buy 2,000 shares of ABC at 15.75" B) "Buy 3,000 shares of JKL at 18.25 Do Not Reduce" C) "Sell 1,000 shares of XYX at 22.50 GTC" D) "Buy 1,000 shares of XYZ immediately at the best available price"

A -- Buy limit and sell stop orders must be adjusted based on the distribution terms on the ex-dividend date. A client may also provide specific instructions to indicate that their order should not be reduced.

An instrument in which investors are protected by FDIC insurance, up to $250,000 per depositor, is A) a certificate of deposit (CD). B) a banker's acceptance (BA). C) commercial paper (CP). D) a U.S. Treasury bill (T-bill).

A -- CDs are deposit accounts or promissory notes issued by banks. They are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per depositor.

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

A -- If issuers want the best price for shares with the least risk of unsold shares, they should elect a competitive bidding process with a firm commitment by the underwriter. Issuers may choose a negotiated process if underwriter-selection criteria other than price (comfort, relationship) are important. Firm commitment means the underwriter buys shares from the issuer, regardless whether these shares can be resold to the public.

All of the following statements regarding premiums for index options are true EXCEPT A) The premium of an index put will generally increase as the level of the underlying index increases B) The premium of an index option is comprised of intrinsic value and time value C) An index premium point is ordinarily equal to $100 D) Premiums for index options are quoted in points and decimal amounts like equity options

A -- Index options premiums are similar to equity option premiums. They are quoted in points and decimal amounts, and multiplier is ordinarily equal to $100, and premium components are intrinsic value (the in-the-money amount) and time value. The premium of a put on either an index option or an equity option increases as the underlying decreases in value.

A broker must have a reasonable basis to make a recommendation, meaning the recommendation must be suitable A) For some investors B) For most investors C) For reasonable investors D) For at least a few investors

A -- Initially it seems that some answer choices are the same. However, in the case of this question one is more correct than the other. In fact, this question is testing the exact wording that FINRA uses in reference to reasonable basis suitability. In this instance, you will have to memorize the use of the word 'some' in relation to when a broker must have a reasonable basis to make a recommendation. Key takeaway: The standard of reasonable basis suitability states that a recommended security or strategy should be suitable for at least 'some' investors.

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

A -- Marking the close occurs when a trader attempts to manipulate the closing price of a stock by placing an order just prior to the close of trading.

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

A -- Nasdaq is a negotiated market where market makers negotiate a price with other customers and broker dealers. The other type of market important for the exam is an auction market, which is where securities trade on an exchange floor, such as the NYSE.

Donald is employed by a company that offers a straight profit-sharing plan. He wants to know whether he is required to contribute his own money to the plan, and also whether the company is required to contribute money. The answer is A) neither employees nor the employer are required to make annual contributions. B) employees are required to contribute; employers aren't. C) employees are not required to contribute; employers are. D) both employees and the employer are required to make annual contributions

A -- Profit-sharing plans are designed for flexibility. They allow employers to make contributions in profitable years (or whenever they wish) and make little or no contributions in other years. The key requirement is that the same percentage of salary must be contributed for all eligible plan participants.

May a registered rep borrow money from a client? A) Yes, if the client is a bank and the loan is on market terms. B) Yes, if the loan arrangement is pre-approved by FINRA. C) No, this conduct is expressly prohibited by FINRA rules. D) No, this would be deemed a conflict of interest.

A -- Registered reps are permitted to borrow money from a client, if the client is a bank and the loan is made on competitive market terms and not at a discounted rate.

A bond has a call feature under which it can be called on May 1 of the years 2024, 2026 and 2028. It matures on May 1 of 2030. The yield to call (YTC) calculation assumes A) the bond is called on 5/1/24. B) the bond is called on 5/1/26. C) the bond is called at the midpoint of the three call dates. D) the bond is called on 5/1/28.

A -- Some bonds have more than one call date. Always assume the first call date in the calculation of YTC.

An investor owns 100 shares of XYZ stock at $50 and sells 1 XYZ Nov 55 Call @3. What is the investor's breakeven? A) $47 B) $52 C) $55 D) $58

A -- Subtract premium from market price

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

A -- The Dodd-Frank Wall Street Reform Act of 2010 added provisions designed to increase transparency and disclosure in hedge funds. Hedge funds that manage private funds with more than $150 million in assets must register with the SEC.

For an equity trade, which of the following is not included on a customer confirmation? A) Customer's bid or ask price B) Trade date C) Quantity of shares D) Transaction price

A -- The confirmation includes the trade date, amount and price. It does not include the customer's bid or ask price on a limit order.

An option strategy that may permit an investor to purchase stock and receive a premium is A) Short puts B) Short calls C) Long puts D) Long calls

A -- The sale of a put requires an investor to buy shares when assigned. Additionally, when writing a put, an investor earns the premium for selling the option.

The over-the-counter trading of exchange-listed securities takes place in which of the following markets? A) Third market B) Second market C) First market D) Fourth market

A -- The third market refers to over-the-counter, negotiated-price trading of exchange-listed securities. An example of this would be a broker dealer making a market in Disney stock (which is an NYSE security).

Individuals may have the option of purchasing a 529 college saving plan from an adviser, as opposed to the state itself. These plans are known as A) Adviser-sold plans B) Third-party plans C) Direct-sold plans D) Intermediary plans

A -- These are examples of adviser-sold plans. Many states permit this type of arrangement.

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

A -- When securities are held in street name the broker-dealer is the nominal, or named, owner, and the issuer sends proxy statements and all other information about the securities to the firm, which must then distribute the information to the customer, who is the beneficial owner. DRS, DWAC and registered physical securities all list the customer as the named owner, so the issuer can communicate with the customers directly.

1035 Exchange

A 1035 exchange is done to transfer one annuity contract into a different contract. There is no tax consequence incurred when doing this transaction.

A brokerage firm can open an account for all of the following EXCEPT a(n) A) minor B) estate C) insurance company D) pension fund

A--A brokerage firm cannot open an individual account for a minor. It can open a UGMA account with an adult as the custodian for one minor.

arking a registration is a violation of FINRA rules and occurs if A) A broker-dealer sponsors an individual who is not employed with the broker-dealer. B) A broker-dealer sponsors an individual who is in ineligible for FINRA registration C) A registered representative is employed by two broker-dealers simultaneously. D) An employee passes a FINRA qualification exam and resigns two months later

A--Parking a registration occurs when a broker-dealer sponsors an individual for a FINRA qualification exam and that person is not employed by the firm.

All of the following regulators enforce the MSRB rules for banks except A) FINRA. B) Federal Reserve. C) FDIC. D) Comptroller of the Currency.

A--The MSRB creates rules, but does not enforce its own rules. The MSRB rules are enforced by FINRA for securities firms. Within banks, they are enforced by the Federal Reserve, Comptroller of the Currency, and the FDIC.

Which of the following is a type of risk not commonly associated with ADRs? A) Inflation risk B) Currency risk C) Call risk D) Political risk

ADRs do not carry call risk, as they are equity securities and as such the issuer does not have the right to redeem the shares from the investor.

In which case can Maurice take a qualified distribution from his Roth IRA before he meets the five-year holding period requirement, measured from his first Roth IRA contribution? A) He loses his job B) In no case C) He turns age 59 ½ D) He becomes disabled

B -- There are no exceptions to the five-year holding period requirement. It must be met to take a qualified distribution from a Roth IRA.

Under federal anti-money laundering regulations, a Suspicious Activity Report (SAR) must be filed within how many days of the discovery of suspicious activity? A) 15 business days B) 30 calendar days C) 30 business days D) 15 calendar days

B -- Under federal AML regulations, Suspicious Activity Reports must be filed within 30 calendar days of the discovery of the suspicious activity.

During a period of falling interest rates which of the following is likely to occur? A) Callable bonds will appreciate more than the noncallable bond B) Noncallable bonds will appreciate more than callable bonds C) Both callable and noncallable bonds will fall in value D) Both callable and noncallable bonds will appreciate in value equally

B -- Bond prices increase during periods of falling interest rates. Callable bonds are likely to be called when interest rates are falling so issuers can refinance at lower rates. An investor will lose future interest payments when the bonds are called and face reinvestment risk, so this is not favorable to the investor. Therefore, callable bonds will trade at less of a premium than noncallable bonds when interest rates are falling.

Call premiums perform which of the following? A) Require issuers to notify the sponsor when retiring a bond B) Protect investors from having debt with an attractive yield refinanced long before maturity C) Protect issuers from having debt with an attractive yield refinanced long before maturity D) Require investors to notify the issuer when retiring a bond

B -- Call premiums mitigate reinvestment risk in the event interest rates decline by requiring the issuer to pay a premium if refinancing the bonds prior to maturity. For example, a 10-year bond with a 10-year maturity might have a call premium of 105% after the first call date. This would require the issuer to pay investors 105% of par to call away the issue.

David has set up a 529 college savings plan for his daughter Ruby. Three years after the plan is established, David takes a distribution to cover a necessary home repair. This distribution A) Will be subject to taxes but no penalty B) Will be subject to a penalty and ordinary income taxes as applicable C) Will subject David to an IRS audit and possible fines. D) Would be permitted as long as IRS Form 529 is filed at least 30 days prior to the distribution being taken

B -- Funds withdrawn from a Section 529 College Saving Plan are generally free from federal tax liability. If, however, these funds are not used for a qualified higher educational expense, a penalty and applicable taxes will be due.

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

B -- Generally speaking, the higher the risk of a bond, the higher its yield spread. A bond issued by a large well-known, and financially strong municipality will typically trade at a relatively low spread in relation to U.S. Treasuries. Spreads widen in weakening economies and narrow when the economy is strong.

Most hedge funds are open-ended, meaning A) anyone can join the hedge fund as an investor. B) investors can add or withdraw funds on a monthly or quarterly basis. C) investors can allocate money among sub-accounts. D) the fund will always create new shares to meet investor demand.

B -- Hedge funds do not have the daily liquidity of mutual funds. But open-ended hedge funds allow investors to add or withdraw funds periodically, usually with prior notice.

What is the correct sequence of the following interest rates from high to low? A) Discount rate, Broker's call rate, Prime rate, Federal funds rate B) Prime rate, Broker's call rate, Discount rate, Federal funds rate C) Federal funds rate, Discount rate, Broker's call rate, Prime rate D) Discount rate, Prime rate, Broker's call rate, Federal Funds rate

B

Which regulatory agency has the authority to create rules for 529 plans? A) Federal Trade Commission B) Municipal Securities Rulemaking Board C) FINRA D) The SEC

B

An investor sells short 100 shares of XYZ stock at 61 and buys 1 XYZ 65 call for 1.50 When the market price of XYZ is 62. What is the investor's breakeven on the combined positions? A) 62.5 B) 59.5 C) 60.5 D) 63.5

B When an investor buys a call to protect a short stock position, the investor will breakeven when the stock price is equal to the price at which the stock was sold short minus the call premium paid. 61 - 1.50 = $59.50. The investor is bearish and will make money only when the short position can be bought in and price below this point because of the premium that was paid for the call.

A Real Estate Investment Trust (REIT) is a security that is categorized as a(n) A) type of direct participation program (DPP). B) neither an investment company nor a direct participation program (DPP). C) Investment company portfolio. D) Real estate limited partnership.

B -- A Real Estate Investment Trust is legally structured as a trust; it is not a type of investment company or direct participation program.

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

B -- A UIT is a fixed portfolio of assets which is assembled by a sponsor. There is no active management of the portfolio.

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

B -- A call is always at the option of the issuer, never the investor. Normally, a call feature creates extra risk by shortening the investor's holding period, especially in times of falling rates. Issuers may agree to pay an additional price (call premium) above par for the call option.

A mutual fund that wishes to charge the maximum sales charge of 8.5% must offer all of the following features EXCEPT A) Rights of accumulation B) A level load share class option C) Breakpoint schedule D) Automatic reinvestment of dividend and capital gains distributions at NAV

B -- A level load share class option is not one of the features required for a mutual fund to charge the maximum sales charge. The three required features are breakpoints, reinvestment of dividends at NAV, and rights of accumulation.

An investor is short an ABC Jan 65 put for a premium of 7. If at expiration the price of ABC is 53, which of the following statements is TRUE? A) The investor must deliver stock at expiration B) The holder of the contract will exercise the contract C) The contract's breakeven is 72 D) The contract is out-of-the-money at expiration

B -- A put is in-the-money whenever the price of the underlying stock is lower than the strike price. This contract is in the money, and profitable to the holder at expiration, because the breakeven is 58 (strike price minus premium for puts). The put holder will exercise the contract, and has the right to sell stock at 65. The writer (the party that is short) must buy it, when the current market price is actually 53. The loss to the writer is offset by the premium received.

All of the following are credit items in the computation of the balance of trade EXCEPT A) Exports B) Imports C) Foreign spending in the U.S. economy D) Foreign investment in the U.S.

B -- Balance of trade is the difference between a country's exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

If FINRA or the SEC issues an order that imposes a suspension of the registration of a registered representative, the representative is prohibited from A) Acting in a clerical capacity for the firm B) Associating with the firm in any capacity whatsoever C) Performing sales functions, but can receive compensation earned during the period D) Continuing performing sales functions if the firm has permission from FINRA, and if the firm has agreed to heightened supervision of all transactions

B -- If FINRA or the SEC suspends a registered representative, the firm cannot allow the representatives to remain associated with it in any capacity, including a clerical or ministerial capacity. The firm is also unable to pay or credit any remuneration that results from any securities transaction that the representative might have earned during the period of suspension.

An investor considering making a bond purchase in a deflationary environment may be more attracted to a(n) A) treasury bill B) outstanding issue of debt C) STRIP, which eliminates reinvestment rate risk D) new issuance of debt by a top rated corporation

B -- In a deflationary environment, investors may be more attracted to outstanding debt, which will likely carry higher interest rates than newly issued debt, given that interest rates are likely lower in the current economic landscape.

In a self-directed retirement plan, such as a 401(k), what is an "elective deferral?" A) A waiting period B) An employee contribution C) An employer contribution D) An IRS required amount

B -- In a participant-directed plan, the employer chooses the plan and a menu of investment options. Each eligible employee then may choose to make elective deferrals of wages into the plan, up to limits.

When option contracts in the same class share an expiration month and strike price, they are said to be A) In the same class B) In the same series C) In-the-money D) Trading at parity

B -- Options of the same class having the same expiration month and strike price are in the same series.

Which of the following may not be used as a factor in determining a fair price when a broker dealer is trading in an agency capacity? A) Security availability B) The right of the firm to make a profit C) Price of the security D) Dollar size of the transaction

B -- Other pricing factors, beyond the 5% policy, should be considered, including the security price and availability and dollar size of the transaction. The broker-dealer's profitability or profit targets may not be used as a pricing factor when trading in an agency capacity.

Participating preferred stock is best characterized as stock that A) Allows the holder to forfeit their voting rights in return for an additional dividend distribution B) Allows the holder to receive an additional dividend distribution C) Requires the corporation to pay an additional dividend to all common stockholders D) Carries special voting rights

B -- Participating preferred stock allows the holder to receive an additional dividend distribution, usually contingent on the occurrence of a specific event, such as a particular level of common stock dividend.

Which of the following is a characteristic of revenue bonds? A) Full faith and credit of the issuer B) User fees C) Tax limits D) Voter referendums

B -- Revenue bonds are backed by fees that are generated from the use of the facility. Taxes back general obligation bonds. The full faith and credit of the issuer is backing for GO bonds, and includes the issuer's ability to tax. A vote by taxpayers is often required to authorize a new GO bond issue.

In which of the following scenarios is the 5% Policy applicable? A) Betty receives an allocation of shares of an IPO and makes payment to her RR B) Peter purchases a closed-end investment company from his RR in the secondary market C) Fred subscribes to mutual fund shares and makes payment consistent with the instructions in the prospectus D) Mary buys a Regulation A offering and receives an offering circular

B -- The FINRA 5% Policy applies to secondary market trades in both listed and unlisted securities.

A) Be exercised only if the counterparty to the contract has met the initial margin requirement for purchase of the stock B) Be automatically exercised according to OCC provisions C) expire D) Be exercised only if the holder gives exercise instruction

B -- The Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration. This procedure is also referred to as "exercise by exception." Generally, the OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. However, the customer's broker-dealer may have a different threshold for automatic exercise which may or may not be the same as the OCC's.

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

B -- The calculation of accrued interest includes interest on the prior payment date up to, but not including the settlement date. Municipal bond accrued interest is calculated based on 30-day months. If you start counting on the 15th of a 30 day month, there are 16 days of interest. There are 2 additional days in February for a total of 18 days of interest.

Which entity serves as the agent or market maker in the fourth market? A) Specialists B) Machines C) Market makers D) DMMs

B -- The fourth market consists of electronic communications networks (ECNs), passive computer systems that act as agents, automatically matching buy and sell orders. They can operate 24 hours per day, seven days per week. Effectively, machines serve as agents or market makers in this market.

An investor purchases 200 shares of STP stock for $64 per share and buys 2 STP 62 puts for 1.50 when the market price of STP is $65. What is the maximum loss? A) unlimited B) $700 C) $450 D) $350

B -- The investor loses money on the stock when the market price falls. But, the long put allows the investor to sell the stock at 62. Thus, the investor can lose $2 per share on the stock, plus the premium of $1.50 that was paid for a total of $3.50 per share. 200 shares x $3.50 = maximum loss of $700.

A registered representative tells a customer to move money from one mutual fund to another fund with a similar investment objective, without stating any purpose or benefit of the trade. This violation is referred to as A) late trading. B) switching. C) freeriding. D) spoofing.

B -- The violation of switching (also called churning) occurs when a registered representative moves a customer from one mutual fund to another fund that is very similar, without apparent purpose or benefit.

If a municipal securities firm markets LGIP securities to potential customers, which of the following statements is TRUE? A) Investors must receive an Information Statement no later than the date the trade is made B) Investors must receive an official statement no later than the settlement of the transaction C) Investors must receive a prospectus no later than the settlement of the transaction D) There is no specific disclosure document required because purchasers of these securities are institutional and sophisticated investors

B -- When municipal securities firms market LGIP securities, they are required to provide an official statement for disclosure no later than the settlement date. This statement is often called an Information Statement, but delivery is not required until the settlement date, not the trade date. The prospectus delivery requirement applies to corporate securities.

When is the settlement date for physical delivery of stock when options have been exercised? A) The day of exercise B) The 2nd business day after exercise C) The 3rd business day after exercise D) The 5th business day after exercise

B -- When options have been exercised, settlement date for physical delivery of stock is 2 business days after the exercise date.

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

B --Municipal securities firms are prohibited from selling municipal securities to customers unless an official statement is available for delivery to the customer no later than the settlement date of the transaction.

A company has established a qualified retirement plan. This means that A) Contributions are pre-tax and growth is taxed as capital gains at the point of distribution. B) Contributions are post-tax and growth is tax-deferred. C) Contributions are pre-tax and growth is taxable as the account increases in value. D) Contributions are pre-tax and growth is tax-deferred. Previous

C

The most volatile interest rate is the A) Discount rate B) Brokers' call rate C) Federal funds rate D) Prime lending rate

C

A communication made available to 20 institutional clients and 20 retail clients is classified as A) A blog post B) Institutional communication. C) Correspondence. D) Retail communication.

C -- A communication made available to retail investors cannot be classified as institutional. If the number of retail recipients is up to and including 25 persons, it is classified as correspondence. For larger audiences (more than 25 retail persons), it is considered retail communication.

Which of the following terms does not characterize a hedge fund? A) Speculative B) Selective C) Transparent D) Illiquid

C -- A hedge fund is essentially an unregulated investment company. It is often an aggressively managed portfolio of investments that may employ may different investment strategies to achieve its investment objectives. These products tend not to be transparent in terms of revealing their investment protocols to the general public.

Which of the following is a strategy that is used by investors to secure profits from a stock position that an investor had previously purchased? A) Long call B) Uncovered call C) Protective put D) Short put

C -- A protective put is used to "insure" profits on a long stock position. It gives the buyer the right to sell stock at the exercise price to protect profits that have already been made.

The purchaser of which of the following is likely to receive an offering memorandum? A) Registered debt offering B) Preferred stock issuance C) Regulation D offering D) American Depository Receipt

C -- An offering memorandum is a disclosure document usually provided for exempt transactions, such as Regulation D or Regulation A offerings.

Direct-sold 529 college savings plans A) Usually offer investment advice directly from the state. B) Can only be purchased in states approved by the IRS for this purpose. C) May be purchased through a primary distributor, or through state personnel. D) Incur fees which are typically higher than with an advisor-sold plan.

C -- Direct-sold 529 plans can be purchased without the aid of an intermediary. The investor, though, may not be able to receive the same type of investment advice that would typically be available through an adviser-sold plan.

XYZ Inc. declares a $0.45 dividend payable on Monday, July 14, to all shareholders of record as of Monday, July 7. When is the ex-dividend date for a regular way trade in the stock? A) Tuesday, July 1 B) Wednesday, July 2 C) Thursday, July 3 D) Friday, July 4

C -- For regular way trades in equities, the ex-dividend date is one BUSINESS day before the record date. In this case, July 4 is a holiday. Therefore, the ex-date will be Thursday, July 3.

A registered representative of a broker-dealer is interested in taking a part-time job on the weekend to supplement his full-time income. The representative would be required to A) Notify his broker-dealer within a reasonable time of starting the part-time job B) Notify and receive permission from his broker-dealer C) Notify his broker-dealer prior to starting the part-time job D) Notify and receive permission from FINRA

C -- In order to engage in an outside business activity, a registered representative must notify his employer in writing prior to the commencement of the activity. The rule does not stipulate that the individual receive permission from the firm, although this may be required by the firm itself as part of its internal supervisory procedures.

Investors are required to receive a prospectus, or notice of the availability of a prospectus, with the delivery of IPO shares sold within A) 90 days of the effective date. B) 10 days of the effective date C) 25 days of the effective date D) 5 days of the effective date

C -- Investors must receive a prospectus, or notice of availability of a prospectus, with any IPO shares sold within 25 days of the effective date of the IPO.

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

C -- Limited partners cannot execute or bind contracts on behalf of the partnership. That role belongs to the general partner. Limited partners have limited liability in return for their passive role in managements. They receive a proportionate share in the losses and gains of the partnership based on the units they own.

Which of the following types of REITs is most likely to generate interest income for investors? A) Balanced REIT B) Equity REIT C) Mortgage REIT D) Hybrid REIT

C -- Mortgage REITs pass through interest that has been earned on mortgages in the portfolio as income to investors.

With regard to municipal taxing authority, which of the following statements is TRUE? A) States usually rely on property taxes to back GO bond issues. B) Most cities and counties may issue GO bonds without voter referendums. C) The taxing authority of municipalities varies widely depending on applicable state or local laws. D) A high debt limit is viewed as a greater sign of safety than a low debt limit.

C -- Municipal taxing authority and statutes that address types and amounts of taxes vary considerably. Most local government bond issues require voter approval or referendums before they can be issued. States typically rely on sales or income taxes for backing of bond issues. A low debt limit is typically viewed more favorably because the municipality potentially has less outstanding debt to service.

Hedge funds and mutual funds are similar in all of the following ways EXCEPT A) Short term capital gains paid by either fund are taxed to investors at a higher rate than long term capital gains B) Neither pay taxes on income they pass through to investors C) They both pass through income and losses to investors D) Capital gains paid to investors by either fund are taxed more favorably than ordinary dividends

C -- Mutual funds do not pass through losses to investors. Neither entity pays taxes on income that it distributes to investors.

When a bond's market price increases, what is the impact on its nominal yield? A) Nominal yield will decline. B) Nominal yield will increase. C) There will be no change in nominal yield. D) There will be increased volatility in the nominal yield.

C -- Nominal yield is the bonds annual interest or coupon rate. It is a percentage of par value and fixed over the life of the bond.

Which of the following is an example on a non-qualified retirement account? A) 401 K plan B) HR 10 plan C) Payroll deduction plan D) Profit-sharing plan

C -- Payroll deduction plans are non-qualified retirement plans. With these plans, employees may deduct a portion of their salaries for retirement savings, but those funds are taxable when earned.

The best way to mitigate prepayment risk is to A) invest in mortgage-backed securities (MBS) that cannot be prepaid. B) buy prepayment insurance. C) reduce exposure to mortgage-backed securities (MBS). D) reinvest prepayment as soon as they are received.

C -- Prepayment risk is associated with mortgage-backed securities (MBS). When interest rates are falling, homeowners refinance or prepay their mortgages, which causes principal to be repaid faster to MBS investors. Because mortgages are typically refinanced in falling-interest-rate environments, the MBS holder is left to reinvest the capital in the lower-interest-rate environment.

When comparing rights and warrants, which of the following statements is TRUE? A) Warrants have shorter expiration periods than rights B) Rights are often added to bond issues as sweeteners; warrants are offered to existing shareholders to permit them to maintain their proportionate interest in the company when additional shares are issued C) The exercise price of a right is generally below the price of the stock when the right is issued; the exercise price of the warrant is generally above the price of the stock when it is issued D) Warrants protect shareholders against dilution, rights do not

C -- Rights are short-term instruments that allow a shareholder to purchase the stock below its market price for a period that usually expires after 4-6 weeks. They are issued to existing shareholders in proportion to their ownership interest, so that if exercised, they allow the shareholder to maintain their percentage of ownership, or protect against dilution. Warrants are long term instruments and are often used as sweeteners in corporate bond issues. They do not protect shareholders from dilution.

A separate risk disclosure statement is required when all of the following types of accounts are opened for non-institutional investors EXCEPT A) Options accounts B) Margin accounts C) Custodial accounts D) Day trading accounts

C -- Separate account disclosure is required when the account risk may be relatively high, as in options accounts, margin accounts and day trading accounts. Custodial accounts require additional documentation but not additional disclosure.

The RIA (Registered Investment Adviser) is most comparable to what other type of recognizable professional designation? A) Chartered Life Underwriter B) Certified Public Accountant C) None D) Certified Financial Planner

C -- The RIA is not a professional designation and generally may not be advertised or communicated to clients. This helps to avoid confusion with legitimate professional designations.

How often must a customer who opens a margin account receive disclosure of the risks of trading in such an account? A) with each account statement. B) quarterly. C) at the opening of the account and once per calendar year thereafter. D) at the opening of the account only.

C -- The disclosure of the risks of margin account trading must be given to the customer at the time the account is opened and annually thereafter.

The goal of portfolio rebalancing is to ensure that A) All investment categories are equally weighted. B) The allocation of stocks, bonds, and cash is reviewed at least once each year to ensure that the best performing assets over the past year are given additional weighting in the portfolio. C) No asset class becomes over-weighted in a portfolio D) The registered representative handling the portfolio always has an opportunity to make changes in the investor's portfolio.

C -- The goal of portfolio rebalancing is to ensure that the portfolio is returned to its original proportionate investment mix. This may involve selling an asset that has become over-weighted due to recent strength in that sector.

An investor sells 2 put options on a stock currently valued at $72. The strike price of the option is $75, and the premium received is $7. The maximum loss on this position is A) $16,400.00 B) $13,000.00 C) $13,600.00 D) $15,800.00

C -- When an investor sells a put option, maximum loss will occur if the stock falls to zero as the investor will be obligated to buy the stock at the strike price, even though the shares are worthless. For taking on this obligation, the investor does receive the premium. To calculate maximum loss subtract the premium from the strike price and then multiply by both the number of contracts and shares per contract. $75 - $7 = $68. 100 shares x 2 contracts x $68 = $13,600. For any question on put option maximum gain, loss or breakeven, ignore the market value of the underlying.

Earnings per share estimates are developed and released by A) Investment banking analysts B) The issuer's chief financial officer C) Research analysts D) Sales and trading

C--EPS estimates produced and released by independent research analysts who follow a selected list of companies, frequently in the same sector. They are NOT produced internally by the issuer. To avoid unauthorized dissemination of inside information, the research department must be separate from other broker-dealer departments including investment banking and sales/trading.

Breakeven

Call: Strike + Premium Put: Strike - Premium

Kevin is a registered representative, who is moving from his firm's New York to San Francisco office. In order to update FINRA of this change, his A) Form U4 must be updated within 10 days of the change B) Form U5 must be updated within 30 days of the change C) Form U5 must be updated within 10 days of the change D) Form U4 must be updated within 30 days of the change

D

Owners of a corporation's common stock are required to receive audited financial information about the company A) quarterly. B) semi-annually. C) monthly. D) annually.

D

A registered representative has become deficient in making timely payments on his credit card, resulting in a reduced credit standing. This activity must be A) recorded on the books and records of the broker-dealer. B) documented in the rep's employee file and the rep must be placed on a watch list until the situation improves. C) reported to FINRA within 10 business days. D) reported to the compliance department of the firm.

D --

In which of the following situations would it be appropriate for a registered representative to lend money to a client without receiving permission from the firm? A) The client is waiting for a paycheck to clear and would like to make a stock purchase now. B) The client and the rep are partners in a joint venture outside the brokerage relationship. C) The rep and the client have been close personal friends for many years pre-dating the client relationship. D) The client is a financial institution engaged in the business of lending money.

D -- A registered representative can lend money to, or borrow money from, a client if the client is a bank or a family member, or there is some type of outside personal or business relationship. If the client and rep have been friends for a long time that would potentially qualify. It is important to note though, that it would still require permission from the firm. If the client happens to be a bank or family member, permission from the firm would not be required.

A common investment strategy is "selling short". An investor who sells short is A) Selling stock that he holds that is currently in the custody of a bank B) Selling stock that he owns and will deliver it before the end of the business day C) Selling stock that he owns but will not deliver for a few days D) Selling stock that he intends to own but does not own at this point

D -- A short sale is the sale of a security that the seller does not currently own. It is regarded as an investment strategy for investors who believe the value of the security will fall.

A registered representative would be least likely to recommend a variable annuity to an individual who A) is a college graduate with no student loan debt, and is currently employed B) is not covered by an employer retirement plan. C) has reached their maximum contribution level in their other retirement plans. D) is currently unemployed and is carrying significant monthly expenses.

D -- A variable annuity would not be suitable for an individual who has significant cash needs and in unable to set aside funds today for retirement.

A share in a foreign corporation that underlies an ADR is known as a(n) A) GDS B) GDR C) ADP D) ADS

D -- An American Depositary Share (ADS) is the name given to the shares of the foreign corporation that are held by the depositary institution. These shares are packaged to create the ownership interests known as American Depositary Receipts. A Global Depositary Share (GDS) is the underlying for a Global Depositary Receipt (GDR)

When a decision on a dispute between a representative and a member firm is reached through an arbitration proceeding, the decision A) may be reviewed and renegotiated in a mediation proceeding B) may be appealed through the court system C) must be reviewed and approved by NAMC before parties are required to pay awards that are due D) is final and binding on all parties

D -- An arbitration proceeding results in a final decision that is binding on all parties. The decision is rendered within 30 days, and any monetary awards are payable by the parties within 30 days of the decision.

An investor is likely to purchase a put for all of the following reasons EXCEPT A) To prevent a long stock position from losing money B) To protect a gain on a long stock position C) To profit from a decline in the value of stock D) To generate income for a portfolio

D -- An investor pays a premium to purchase a put, so income is not generated from this position. Long puts can protect a stock position from loss, protect a gain, or profit from a decline in the value of the underlying stock.

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

D -- Cash settled trades settle on the same day. Therefore, an investor could buy stock on the record date and still settle in time to receive the dividend. Therefore, the ex-dividend date for a cash settled trade will be the business day after the record date.

Commercial loans outstanding is what kind of economic indicator? A) Coterminous B) Leading C) Coincident D) Lagging

D -- Commercial loans outstanding is a lagging indicator. One way to remember this because loans outstanding must be calculated at the end of the quarter after all payments have been received.

What is the minimum work service requirement that an ERISA plan may choose to adopt for eligibility purposes? A) One year B) Six months C) One month D) None

D -- ERISA's general standard is one year of work service. Each ERISA plan can adopt less restrictive standards than ERISA requires, but not more restrictive. For example, some plans choose to require no work service to become eligible.

In administering Regulatory Element Continuing Education, a broker-dealer is required by FINRA to do all of the following EXCEPT A) Designate a contact person to receive Regulatory Element email notifications B) Restrict CE inactive persons from performing prohibited activities C) Review quarterly Regulatory Element performance reports to determine topics where additional training may be needed D) Develop an annual needs analysis and training program

D -- FINRA does not require firms to develop their own Regulatory Element programs. Regulatory Element CE is administered and delivered by FINRA. This requirement applies to Firm Element. On an annual basis, a broker-dealer is required to conduct a needs analysis and training plan for the delivery of Firm Element training.

Firms must report to FINRA any written customer complaints A) within 10 business days B) within 30 days C) immediately D) within 15 days of the end of the quarter in which the complaint was submitted

D -- Firms are required to make detailed reports to FINRA based on the nature and consequences of a customer complaint. These must be made by the 15th day of the month following the calendar quarter in which the customer complaint was received by the firm.

A Registered Representative plans to open a securities account at a firm other than the one at which she works. The representative A) Must provide prior written notice to FINRA of her intention to open this account B) Must provide prior written notice to her firm of her intention to open this account C) Must receive prior written consent from FINRA in order to open this account D) Must receive prior written consent from her firm in order to open this account

D -- If a registered representative opens a securities account at a different broker-dealer, they must notify and receive written consent from their employer prior to opening the account.

Why are U.S. Treasury Securities used for conducting Open Market Operations? A) Because they are guaranteed by the federal government B) Because their low interest rates keep the cost of conducting open market operations as low as possible C) Because they are recognized as a global standard of value in the international marketplace. D) Because the market for these securities is the broadest and most active in the U.S. financial markets

D -- In order to manage open market operations, the Open Market Committee needs the ability to buy and sell quickly in whatever volume of securities needed. The market for U.S. Treasury securities offers these capabilities, as it is the broadest and most active of U.S. financial markets.

A portfolio manager wants to hedge his long equity positions and increase the portfolio's income. Which of the following strategies is appropriate? A) Short index put B) Long index call C) Long index put D) Short index call

D -- Income is achieved from writing options and receiving premiums. Short index calls provide some downside protection (the amount of premium received), and also increase the income to the portfolio.

Judy started a 529 plan for her daughter three years ago. If she earns $2,000 on its investments this year, how is this amount treated for income tax purposes now, assuming she does not plan to start taking distributions for college expenses for several more years? A) It is always tax-free B) It is currently taxable as capital gains C) It is currently taxable as ordinary income D) It is tax-deferred until distribution

D -- Investment earnings accumulate on a tax-deferred basis in 529 plans. There is no IRS reporting until distributions are made. Then, distributions used for qualified education expenses are tax-free.

Which of the following characteristics applies to an investment in a UIT? A) The investor's units have a fixed value B) Investors can add to their holdings through subsequent primary offerings of the trust C) The units can be easily liquidated through exchange trading D) Investors will know the securities that comprise their units for as long as they hold the investment

D -- Investors in a UIT own units in a defined pool of securities that will be held until the date the trust is terminated. The units fluctuate in value based on the securities in the portfolio. Units can be sold back to the trust, and additional units can be purchased when there have been redemptions. The trust does not have subsequent IPOs.

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

D -- Mortgage REITs offer an ownership interest in mortgages held within a portfolio, not the actual properties. Investors in mortgage REITs own shares that pay relatively high dividends, which provide an income stream to investors. Because mortgage REITs provide financing for homeowners and commercial entities, investors help support the recovery of housing markets and overall economic growth.

In which case can a position in listed options be held in a Traditional IRA? A) When it is a naked put or call B) When the IRA owner has sufficient risk tolerance C) Never D) When it is part of a covered call-writing program

D -- Options positions are prohibited in IRAs, except for covered call-writing programs on listed options.

As the number of Treasury shares increase, the company's A) profits will increase. B) revenues will tend to fall. C) outstanding shares will increase. D) outstanding shares will decrease.

D -- Treasury stock represents shares that have been repurchased by the company. As the number of Treasury shares increase, outstanding shares will decline.

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

D -- vThis rate of interest is the broker call rate. It is determined independently by commercial banks. This rate of interest is the broker call rate. It is determined independently by commercial banks.

A 75-year-old customer has not yet begun taking minimum distributions from his Traditional IRA. At what rate must he pay excise tax on the amount of the distribution shortfall? A) 0.75 B) His regular income tax rate C) 0.1 D) 0.25

D-- Under required minimum distribution (RMD) rules, withdrawals from a Traditional IRA must begin by age 73. Note that as of January 1st, 2023, the required minimum distribution (RMD) date is increased to the April 1st following an individual's 73rd birthday (from age 72) and the penalty for a shortfall on an RMD is reduced to 25% (from 50%). Since this law was recently passed, be sure to be prepared for both the new versions of the rule - age 73 RMD and 25% shortfall penalty - as well as the older versions - age 72 RMD and 50% shortfall penalty. For more information, please see the document titled Update for the SECURE 2.0 Act of 2022 in the Knopman.com Training Center (Supplements section).

A registered representative requests permission to participate in a private securities transaction for compensation. If the firm approves participation in the transaction it is required to I. Maintain books and records of the transaction and compensation earned II. Supervise the transaction as if it were business conducted by the firm III. File quarterly reports of this activity and all other private securities transactions with FINRA not later than the 15th of the month following the end of the quarter

I & II Only

Which of the following are requirements of an issuer to pursue an exempt offering under Rule 147? I. The issuer is incorporated in the state II. 100% of the securities must be sold to state residents III. 100% of the issuer's assets must be located in the state IV. The issuer's board of directors must all be residents of the state

I & II Only -- For an intrastate exemption under Rule 147, the issuer's principal place of business must be in the state and 100% of the securities must be sold to state residents. Additionally, they must meet one of the following requirements: at least 80% of the asset must be located in the state, at least 80% of the revenues must be derived from the state, at least 80% of proceeds from the sale of securities must be used in the state, or a majority of the company's employees must work in the state

Which of the statements below correctly describe the par value of common stock? I. Par value and market value are rarely equal II. Par value and market value are typically equal III. Par value of common stock is typically $1 or less IV. Par value of common stock is typically $100

I & III -- Par value is assigned to common stock when it is issued. It is typically $1 or less for common stock, and is simply an accounting value that is not related to the market value of the stock.

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

I & III -- When interest rates are higher in the U.S., foreign investors look for investment opportunities in the U.S. U.S. investors are less likely to seek international investments when foreign interest rates are weak. The dollar is stronger against foreign currency when U.S. interest rates are high. This is in part due to foreign investors selling their currencies for investable U.S. dollars.

Devaluation of the dollar will lead to which of the following? I. An increase in the balance of trade II. A decrease in the balance of trade III. An increase in exports IV. A decrease in exports

I & III -- When the dollar declines relative to other currencies, other currencies are stronger and will buy more U.S. goods. This causes exports to increase which results in a increase in the balance of trade (defined as exports - imports).

When issuers include warrants in bond offerings, the issuer I. typically pays a lower interest rate on the bonds II. typically pays a higher interest rate on the bonds III.has made the bond more marketable IV. has made the bond less marketable

I & III -- When warrants are added as sweeteners to a bond offering, the issuer is able to attract greater investor interest. The bond is more marketable and the issuer can sell it with a lower interest rate.

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

I & IV

Which TWO of the following are TRUE of a broker-dealer's obligation to provide notice to customers of its Customer Identification Program? I. Notice must be given when the account is opened. II. Notice must be given at account opening and annually thereafter. III. Individual copies of the notice must be delivered to the customer. IV. The notice must be provided by any means that ensures the customer will be able to view it.

I & IV -- A CIP must include account opening procedures for providing customers with adequate notice that their identities will be verified by the broker-dealer. Financial institutions may either give customers copies of the notice individually or in a manner reasonably designed to ensure that the customer is able to view it (such as a lobby sign).

ABC corporation will elect 2 members of the Board of Directors at its annual meeting. A shareholder that owns 200 shares of stock may I. Vote 200 shares of stock for each director under statutory voting II. Vote 100 shares of stock for each director under statutory voting III. Split a total of 200 votes any way between the two directors under cumulative voting IV. Split a total of 400 votes any way between the two directors under cumulative voting

I & IV -- Under statutory voting, a shareholder has one vote per share for each director that is to be elected. Under cumulative voting, the shareholder may pool together the total votes (400 in this example, 2 directors x 200 votes) and cast them as preferred.

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

II & IV -- When interest rates are lower in the U.S., foreign investors do not look for U.S. investment opportunities, and U.S. investors are likely to seek international investment opportunities. The dollar weakens against foreign currency when U.S. interest rates are low. This is in part due to U.S. investors selling their currencies for investable foreign currencies.

The termination of a registered representative must be reported to FINRA I. Within 10 business days II. Within 30 days III. On a Form U-5 IV. On a Form U-10

II & IV--A firm must report the termination of a registered representative to FINRA on a Form U-5 within 30 days of the termination. If the rep is terminated for cause, the U-5 must be filed within 10 days.

An investor sells short 200 shares of STP stock for $65 per share and later buys 2 STP 68 calls for 2 when the market price of STP is $64. Which two of the following are TRUE? I. The investor's breakeven is 63 II. The investor's breakeven is 67 III. The investor's maximum gain is unlimited IV. The investor's maximum loss is $1,000

I & IV -- While a question such as this is unlikely on the SIE there are a couple of important takeaways. Firstly, this is a 2-position options problem. Therefore: takeaway #1 is that "call-up" and "put-down" wont work for breakeven. Breakeven is therefore a little more annoying to calculate ... but luckily there is a shortcut for this. Notice that the investor is a) selling short a stock position while b) simultaneously opening up a call option on the same stock. This is a classic short-stock hedge. Breakeven will be: • Price at which the stock is shorted (less) Premium Paid for the call option. • $65 - $2 = $63 At a high level what's going on for breakeven is this: the investor pocketed $65 per share since they shorted the stock. They have that cash on hand. They also paid $2 per share for a call option. If the stock dips down to $63, the investor can return the borrowed shares by buying back at $63 making a $2 difference on the short sale. $65 per share in cash (less) $63 to buy the shares back and return it to the original owner. The $2 gain (on the short sale of the stock) subtracted from the $2 premium paid to own the call gives a total profit/loss of $0. Aka, breakeven. Key takeaway #2: The more interesting point about a short-stock hedge is the fact that this options position will put a cap on the maximum loss that a short investor will potentially face by hedging the investors risk to the short stock. For a short-stock hedge maximum loss will be: Strike of the call option (less) Short price of the stock plus Premium paid. As the explanation states below, "The most the investor can lose is limited by the purchase of the call, which allows the stock to be bought in at 68 if the market goes up". In other words, if you are short a stock you can buy a call option (the right to buy) at a specific strike (depends on your risk tolerance) that you can exercise in the event the market goes way up ... add to that a premium (what you pay to own the option). Note: all of the calculations above are on a per-share basis so when calculating max loss don't forget to calculate the total for the entire position. There are 200 shares at play here. A $5 max loss per share ($68 - $65 + $2) x 200 shares = $1,000 maximum loss. Thus, answer choices I and IV are correct. Please also reference the short hedge example in the Lesson 6: Options video lecture for an additional overview.

Passive income is earned from which of the following? I. Partnership interests in which no active management role is assumed II. Portfolio income III. A part-time business performed outside of business hours which an individual manages

I only -- The IRS defines three main categories of income: active income, passive income and portfolio income. Passive income does not include earnings from wages or active business participation, nor does it include income from dividends, interest or capital gains.

Variable annuities are subject to which of the following securities regulations? I. The Investment Company Act of 1940 II. The Investment Advisers Act of 1940 III. The Securities Exchange Act of 1934

I, II, III -- Like mutual funds, variable annuities are subject to most securities regulations. The Securities Act of 1933, The Securities Exchange Act of 1934, The Investment Company Act of 1940 and the Investment Advisors Acct of the 1940 apply to variable annuities.

The provisions of the MSRB's Telemarketing Rule I. Apply to telephone communication only II. Apply to telephone and fax communication III. Require firms to maintain a do not call list IV. Apply to existing customers of the firm

II & III

The tax advantages a limited partnership offers I. Should be the primary reason an investor chooses a limited partnership as an investment choice II. Should be of use to the investor if the partnership investment is recommended III. Are most useful in sheltering other passive income IV. Are most useful in sheltering ordinary income

II & III

When comparing rights and warrants, which of the following statements are TRUE? I. Rights are longer term than warrants II. Warrants are longer term than rights III. At issue, the exercise price of a right is lower than the market price of the underlying stock IV. At issue, the exercise price of a warrant is lower than the market price of the underlying stock

II & III -- Rights are short term instruments that allow the holder to buy the stock at a price that is typically lower than the current market price of the stock. Warrants are long-term instruments. The exercise price of the stock is typically higher than the market price of the stock at the time the warrants are issued. Warrants have value only if the price of the stock appreciates.

If the Fed repurchases securities with an agreement to resell them back, which two of the following statements are TRUE? I. Interest rates are increased II. Interest rates are decreased III. Money supply increases IV. Money supply decreases

II & III -- When the Fed initiates a repurchase agreement, it purchases securities, and therefore adds money to the banking system. This activity loosens credit and causes interest rates to decline. Note, that this is considered a repo rather than reverse repo because it must be viewed from the perspective of the bank the Fed trades with NOT the Fed itself.

When a customer purchases a new municipal bond, the interest included in the accrued interest calculation I. begins on the trade date II. begins on the dated date III. includes the settlement date IV. does not include the settlement date

II & IV -- For newly issued municipal bonds, the accrued interest calculation begins on the dated date, and includes interest up to, but not including the settlement date.

Which two of the following statements are true about the OCC? I. It is the largest U.S. options exchange II. It guarantees the performance of options contracts III. It creates listed equity options and makes them available for trading IV. It is a clearinghouse for equity options and derivatives

II & IV -- The Options Clearing Corporation clears transactions in equity options and other derivative contracts. It guarantees the performance of options contracts that are assigned and executed by its clearing members

Which two of the following statements are true regarding variable annuity surrender charges? I. They can apply for a period of no more than 5 years II. They are usually a level charge for the period of years during which they apply III. They are similar to mutual fund contingent deferred sales charges IV. When an existing variable annuity contract is exchanged for a new annuity, a new surrender charge period is likely

III & IV -- Variable annuity surrender charges commonly apply for periods of 6 - 10 years. They are similar to CDSCs (contingent deferred sales charges) charged by mutual funds, and decline over the period of years during which they apply. It is important that individuals understand that a new surrender charge period is likely to apply when annuity contracts are exchanged.

What is the typical sequence for the order period: I. Designated Orders II. Group Orders III. Member Orders IV. Presale Orders

IV, II, I, III, -- The typical sequence during the order period is Presale Orders, then Group Orders, then, Designated Orders, and finally member orders.

MLPs -- Master Limited Partnerships (MLPs) have a limited partnership structure. But unlike other limited partnerships A) they have no general partner. B) their units trade actively on stock exchanges. C) they have superior tax advantages. D) their distributions are not taxable.

MLPs have a limited partnership structure but their units trade actively on stock exchanges. They help investors participate in several industries including oil and gas drilling, energy distribution and storage, and shipping facilities.

A broker-dealer is excluded from registration as an investment adviser if both of two tests are met. One test is receipt of no special compensation for advisory services. What is the other test?

Providing advisory services that are solely incidental to the main business Both of two tests must be met by broker-dealers and registered representatives that wish to avoid adviser registration. One is solely incidental services. The other is no special compensation.