Greenlight 1
In a limited partnership, a general partner's minimum participation in profits and losses is: A) 1% B) 5% C) 10% D) 15%
A) 1% According to tax law, a general partner must have at least a 1% participation in profits and losses for a business to maintain limited partnership status.
An employee at your firm is scheduled to meet for dinner with an employee of another firm to discuss a joint business venture. Your firm's employee is unable to attend and agrees to pay for dinner without attending. This would be considered: A) A gift B) A legitimate business expense C) Compensation D) Normal business practice
A) A gift Since your firm's employee did not attend the event, the dinner is considered a gift and subject to FINRA's $100 gift limitation.
Regarding communications, which of the following statements is TRUE concerning the responsibilities of a principal of a broker-dealer? A) A principal must approve retail communications prior to use. B) A principal must approve all institutional communications prior to use. C) A principal must approve all correspondence prior to use. D) A principal must approve all retail communications and correspondence prior to use.
A) A principal must approve retail communications prior to use. A principal must approve retail communications prior to use. However, institutional communications and correspondence are subject to review and supervision by a principal, but not pre-approval
A brokerage firm creates an in-house, non-cash incentive program. This is permitted if it's tied to the RR's sale of which of the following products? A) All securities products that are sold by the RR B) Equity securities that are sold by the RR C) Mutual fund shares that are sold by the RR D) Only the securities that are created by the RR's employing firm
A) All securities products that are sold by the RR A broker-dealer is permitted to create its own internal sales programs that offer non-cash incentives, such as merchandise and vacation trips. However, FINRA places some restrictions on these arrangements. One of the restrictions requires that non-cash incentive programs be based on an RR's total production for all securities products sold, rather than being based on the sale of any specific products. The products may be created by a different broker-dealer, such as a mutual fund sponsor.
Which of the following investors typically are entitled to vote? A) Common stockholders only B) Common and preferred stockholders only C) All stockholders and convertible bondholders D) All stockholders and senior debt holders
A) Common stockholders only While both common and preferred stockholders are considered owners of the company, typically only the common stockholders may vote. Bondholders do not typically have voting rights.
All of the following are features of a Roth IRA, EXCEPT: A) Contributions may be deductible B) Qualified withdrawals at retirement are tax-free C) The maximum annual contribution is the lesser of $5,500 or 100% of earned income D) A five-year holding period must be satisfied for a distribution to be qualified
A) Contributions may be deductible A Roth IRA is a non-deductible type of IRA that offers various benefits to individuals who are preparing for retirement. If a distribution is considered qualified, it is tax-free. A qualified distribution must satisfy a five-year holding period and must be made: after age 59 1/2 upon death or disability, or for the purchase of a first home The maximum annual contribution is the lesser of $5,500 or 100% of earned income for both Roth and traditional IRAs.
A security that pays a fixed amount on a quarterly basis, and also allows the holder to profit if the common stock rises, is known as a: A) Convertible preferred stock B) Convertible bond C) Warrant D) Right
A) Convertible preferred stock Preferred stock pays a dividend to shareholders on a quarterly basis. A convertible bond pays interest on a semiannual basis. A convertible security (bond or preferred stock) would allow an investor to convert the security into shares of the company's common stock, at a predetermined ratio. If a security is convertible into common stock, the price of the security will tend to move with the price of the stock.
A registered person has received a gift that's valued at $150 from the FINRA member firm through which her firm clears trades. This gift is considered: A) Excessive B) Acceptable, but only if it's documented by the gifting firm C) Acceptable, but only if it's documented by the receiving firm D) Acceptable
A) Excessive If an associated person of a member firm provides a gift that exceeds $100 from another FINRA member firm, it's unacceptable and a violation of FINRA rules.
A type of offering in which the issuing corporation is assured of receiving the full amount of the offering and anything unsold is retained by the underwriter is a: A) Firm commitment B) Best efforts C) All-or-none D) Contingency offering
A) Firm commitment A type of offering in which the issuing corporation is assured of receiving the full amount of the offering and anything unsold is retained by the underwriter is a firm commitment.
Which of the following is not subject to the Investment Company Act of 1940? A) Hedge funds B) Inverse ETFs C) Mutual funds D) Leveraged ETFs
A) Hedge Funds Hedge funds are exempt from the Investment Company Act of 1940. On the other hand, mutual funds and ETFs are subject to the Act
If a bond offering is issued with a put provision, it's MOST beneficial to: A) Investors who does not want to hold a bond until maturity B) Investors who want steady income until maturity C) An issuer that wants to make interest payments on the bonds until maturity D) An issuer that does not want to make the same interest payments until maturity
A) Investors who does not want to hold a bond until maturity A put provision on a bond offering is the opposite of a call provision. The put provision gives the investor (bondholder) the right to redeem the bond on a specified date (or dates) prior to maturity. This provision gives bondholders the ability to redeem their bonds prior to maturity in the event that interest rates rise
If a firm places a temporary hold on a customer's account: A) It applies to either the entire account or specific disbursements B) It applies to the entire account C) It only applies to specific disbursements D) It only applies to a specific transfer of securities
A) It applies to either the entire account or specific disbursements If a firm places a temporary hold on a customer's account it can apply to either the entire account or specific disbursements. If the firm places the temporary hold, it must permit disbursements from the account if there is no reasonable belief that financial exploitation is occurring (e.g., paying normal bills
In what type of offering are all of the proceeds directed to the issuer? A) Primary B) Split C) Secondary D) Guaranteed
A) Primary In a primary offering (distribution), all of the proceeds of the offering are directed to the issuer of the securities. In a secondary offering, the proceeds are directed to another party
A brokerage firm will generally distribute which of the following to employees of the firm? A) The restricted list B) The watch list C) A list of the mutual funds it recommends to customers D) A list of the stocks in which it makes a market
A) The restricted list Restricted and watch lists include securities that employees are either restricted or prohibited from trading, or issues that are subject to closer scrutiny by the brokerage firm. The restrictions or limitations associated with the lists apply to employee transactions and to solicited transactions with customers. The restricted list must be distributed to employees; however, the content of the watch list is generally known only to selected members of the legal and compliance departments
For a variable annuity, the calculation of the net asset value is based on which of the following? A) The value at end of every business day B) The value at the end of the month C) The value at the time the investor contributes to the annuity D) The value at the time the annuity contract was signed
A) The value at end of every business day For a variable annuity, the calculation of the net asset value is done at the end of every business day (usually at the close of trading on the exchanges). The actual price that annuitant's will pay for their units is the next calculated NAV (i.e., forward pricing)
If a bond is selling at a premium and is callable at a premium, the yield would be calculated based on: A) The yield-to-worst B) The current yield C) The type of bond D) The nominal yield
A) The yield-to-worst If a bond is selling at a premium and callable at a premium, the yield may be calculated to the final maturity or to the call date, whichever is less. Industry rules require broker-dealers to quote the lower estimate of the yield-to-call or the yield-to-maturity. In each case, the investor would receive a quote based on the most conservative scenario, which is referred to as the yield-to-worst. For a bond that is selling at a premium and is callable at par, the yield is calculated to the call date. The yield-to-call measures the yield that would be earned if the bonds were called at the call price, rather than being held to the maturity date. If a bond is selling at a discount and callable at par, it is quoted on a yield-to-maturity basis
A close friend of an MFP is running for election as treasurer in the MFP's city. If the MFP contributes $450 to his friend's election campaign, for how long is the MFP's broker-dealer restricted from engaging in negotiated underwritings with the city? A) Two years B) Three years C) Five years D) There is no restriction
A) Two years According to the MSRB's Political Contribution Rules a municipal finance professional (MFP) is permitted to make a maximum contribution of $250 per election to an individual for whom she can vote. However, if the MFP cannot vote for the candidate, no contribution can be made. If a violation occurs, the MFP's firm is prohibited from engaging in negotiated underwriting business with the municipality with which the candidate is associated for a period of two years. The $450 contribution violated this rule
Under what circumstances may a husband and wife both be custodians in one minor's account? A) Under no circumstances B) If the minor gives written consent C) If the husband and the wife both agree D) If the account has a market value of at least $15,000
A) Under no circumstances There may be only one custodian for a minor's account. Either the husband or the wife may be the custodian. However, they may not both be custodians for the minor's account
In a 529 plan, can an individual be both the donor and the beneficiary? A) Yes, if the person is of legal age. B) Yes, if the withdrawals will be used for graduate school. C) Yes, if the person has retired. D) Under no circumstances.
A) Yes, if the person is of legal age. A person of legal age can contribute and also be the beneficiary of a 529 plan. The funds can be withdrawn tax-free for qualifying education expenses
Which of the following is the BEST description of inflation? A) A general increase in prices. B) An increase in the stock market. C) A decrease in interest rates. D) The point at which the economy experiences a downturn.
A) a general increase in prices Inflation is when the prices of goods and services rise. Inflation often leads to higher interest rates, which causes bond prices to fall.
A corporation has a 7% cumulative preferred stock issue outstanding. The company paid a $5 dividend in 2009, $6 in 2010, and $7 in 2011. If the company wants to pay a common stock dividend in 2012, the cumulative preferred stockholders must first receive a dividend of: A) $17 B) $10 C) $7 D) $3
B) $10 The cumulative preferred stockholders should receive a yearly dividend of 7%. Since it is a cumulative issue, any dividend that is not paid must be made up prior to a common dividend being paid. If a common dividend is to be paid in 2012, the cumulative preferred stockholders must first receive $10 ($7 for 2012 plus $2 for 2009 plus $1 for 2010
An investor purchases 1 XYZ October 40 put when the market price of XYZ is $41 per share, and pays a premium of $3. What is the maximum profit the investor can have? A) $300 B) $3,700 C) $3,800 D) Unlimited
B) $3,700 XYZ shares could possibly become worthless. The investor can then buy 100 shares for pennies and put (sell) it to the writer for the $40 per share strike price. This equals $4,000 ($40 x 100 shares). The investors' profit is $4,000 minus the $300 premium paid for the put, which equals $3,700. The $3,700 is the maximum profit the investor can have since the share's price cannot go lower than zero
A limited partner would be in jeopardy of losing her limited liability if the partner: A) Received a portion of the project's income and deductions B) Assisted in the decision of which properties to acquire C) Insisted on examining the partnership's financial records D) Made a loan to the partnership
B) Assisted in the decision of which properties to acquire Limited partners have the right to receive their portion of income and losses, examine books and records, and make loans to the partnership. If they get involved in the management of the program, such as deciding which properties to acquire, they could be considered general partners and lose their limited liability.
The relative of an 85-year-old account holder contacts the registered representative of the account and requests that funds be transferred to her account which is also held at the same firm. If the RR suspects financial exploitation, which of the following is the BEST course of action? A) Process the transaction since both accounts are held at the same firm. B) Attempt to resolve the matter with the customer prior to placing a temporary hold. C) Immediately place a temporary hold on the account. D) Contact the attorney for the 85-year-old account holder.
B) Attempt to resolve the matter with the customer prior to placing a temporary hold. According to FINRA, if an RR suspects financial exploitation of a senior investor, he should first attempt to resolve the matter prior to placing a temporary hold on the account. The fact that both accounts are held at the same firm is irrelevant
The payout on a variable annuity is based on a: A) Fixed number of accumulation units with a fluctuating value per unit B) Fixed number of annuity units with a fluctuating value per unit C) Fixed value per unit with a fluctuating number of annuity units D) Fixed number of annuity units with a fixed value per unit
B) Fixed number of annuity units with a fluctuating value per unit When payments begin on a variable annuity, the annuitant is credited with a specific number of annuity units. This number will remain fixed. The annuitant's monthly payment will vary according to the value of the securities representing the units
A broker-dealer is underwriting an initial public offering (IPO) for a company that will be exchange-listed. The broker-dealer continues to deliver prospectuses: A) Only on purchases made, at the public offering price B) For 25 days after the deal has closed C) For 40 days after the deal has closed D) For 90 days after the deal has closed
B) For 25 days after the deal has closed In many cases, broker-dealers are required to continue to deliver prospectuses to purchasers, post the issue's effective date. For IPOs which will be listed, the requirement is 25 days (there is no after-market delivery requirement for listed follow-on offerings). For unlisted follow-on offerings, the requirement is 40 days, and for unlisted IPOs it is 90 days.
A registered person is asked by the sponsor of a limited partnership to sell partnership units to his clients. Since the partnership is not being sold through the representative's broker-dealer, the sponsor will compensate the representative directly. For this situation, which of the following statements is TRUE? A) A registered person cannot participate in this type of transaction. B) For the person to participate, the broker-dealer must give written approval for the transaction and must record the transaction on its books. C) The representative may participate if the sponsor is associated with a FINRA member. D) The representative may participate if the partnership is being sold as a private placement.
B) For the person to participate, the broker-dealer must give written approval for the transaction and must record the transaction on its books. A registered person who intends to participate in securities transactions outside the normal scope of her employer's business (private securities transactions) must provide written notification to her employer. Failure to provide notification is referred to as a selling away violation. If the representative is to be compensated for the transaction, the employee must obtain her employer's written approval or disapproval. If approved, the transaction must be recorded on the books of the employing broker-dealer. If the representative is not being compensated for the transaction, the employing broker-dealer must provide written acknowledgment of the receipt of the employee's notice and may place conditions on the employee's participation in the transaction.
A U.S. Treasury bill is sold in the secondary market on Thursday, March 14. It has a regular-way settlement of: A) Monday, March 18 B) Friday, March 15 C) Wednesday, March 20 D) Thursday, March 14
B) Friday, March 15 Secondary market trades in U.S. Government bonds, notes, and bills settle one business day after the trade date.
Municipal bonds that are backed by the taxing power and the full faith and credit of the issuer are referred to as: A) Revenue bonds B) General Obligation bonds C) Moral obligation bonds D) Special assessment bonds
B) General Obligation bonds General obligation bonds are supported by the taxing power and full faith and credit of the issuer. Revenue bonds are backed by the revenues (user fees) generated by various facilities. Special assessment bonds are payable only from charges that are assessed to those who benefit from a project. Moral obligation bonds are revenue bonds that, with legislative approval, may become general obligations of the issuer
A person pleaded guilty to a charge of counterfeiting and bribery five years ago. He has now been released from prison and is applying for an investment banking position with your firm. Which of the following statements is TRUE regarding his eligibility for current employment in the securities industry? A) If the offenses are not related to securities, the criminal record is of no significance B) He is subject to statutory disqualification and is not currently eligible to be hired C) Pleading guilty does not constitute a conviction, so Harry is eligible for employment D) The branch manager may use her judgment to determine the applicant's status
B) He is subject to statutory disqualification and is not currently eligible to be hired Anyone who has been convicted of a misdemeanor related to securities, or any felony during the last 10 years, is subject to statutory disqualification. A guilty plea is the equivalent of a conviction. Thus, Harry would not be allowed to reenter the securities industry until another 5 years have elapsed
A client has been watching a thinly traded stock and has noticed that it has not had any trading activity today. What type of risk is the MOST significant for this type of investment? A) Business risk B) Liquidity risk C) Inflation risk D) Market risk
B) Liquidity risk If a security is thinly traded, it indicates that the market for that investment is illiquid. If an investment has a wide spread, it means the difference between the bid and ask prices is larger than normal. Market risk, or the risk that the market will affect a security's value, is a real risk, but not the most significant one for a thinly traded stock. Even if the stock market increases, the stock itself may still be illiquid.
For the buyer of an option, the premium paid is considered the: A) Leveraged price B) Maximum risk C) Maximum reward D) Breakeven point
B) Maximum Risk For the buyer of an option, the premium paid represents the maximum loss (risk). On the other hand, for the seller of an option, the premium received represents the maximum gain
A project financed through revenue bonds is experiencing difficulty in that revenues are not sufficient to meet debt service payments. If, through legislative approval, the state pays interest and principal in a timely manner, the issue is MOST LIKELY: A) Double-barreled bonds B) Moral obligation bonds C) Bond anticipation notes D) Limited tax bonds
B) Moral obligation bonds Moral obligation bonds are municipal revenue bonds that are payable by the state if revenues from the project do not satisfy debt service payments. However, in order for the state to service the debt, approval of the state legislature is required. Double-barreled bonds are issued as revenue bonds that are additionally backed by the general obligation of the full faith and credit of the issuing municipality
A change in which of the following choices does NOT require the broker-dealer to send a notice to the customer? A) Investment objectives B) Net worth C) Name D) Address
B) Net Worth Under the SEC books and records rules, a notice must be sent to a customer within 30 days if the account is updated due to a change in the name, address, or investment objectives of the customer.
An investor has a portfolio of bonds that yields 6%. Interest rates have been falling and most of the bonds in the portfolio are due to mature which will force the investor to seek new bonds at lower yields. This investor is experiencing: A) Opportunity risk B) Reinvestment risk C) Prepayment risk D) Credit risk
B) Reinvestment risk Reinvestment risk is the result of not being able to reinvest funds at the same rate after a bond matures or is called. Opportunity risk is the risk that the yield of a chosen investment will be less than the yield of another investment that was not chosen. When interest fall, mortgages may be refinanced and paid off early, resulting in prepayment risk for mortgage-backed securities. Credit risk occurs when a bond issuer is unable to make payments of interest and principal
An individual was convicted of insider trading four years ago and served out her sentence in federal prison. If she is seeking a position as a registered representative, she should be informed that: A) She can be hired, but won't be permitted to talk to clients B) She cannot be hired as an registered representative for six years C) She can only provide advice on securities distributed through private placements since the securities are exempt securities D) Any sales she executes must be preapproved in writing by a principal
B) She cannot be hired as an registered representative for six years A convicted felon is barred from the securities industry for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. A firm may attempt to hire a disqualified person prior to the completion of the 10-year period by filing a waiver request (eligibility proceeding) with an SRO. However, if the SRO grants the waiver, it must notify the SEC and the SEC may choose to overturn the waiver
Which of the following activities is acceptable during the cooling-off period? A) Accepting orders B) Soliciting indications of interest C) Promising an allocation D) Accepting a deposit
B) Soliciting indications of interest During the cooling-off period, underwriting firms and their registered representatives may solicit and accept indications of interest, but the indications are non-binding on either the salesperson or the prospective purchaser
Which of the following actions should be taken if a registered representative (RR) receives a written complaint from a customer? A) The RR should respond to the complaint within 10 business days. B) The RR should forward the complaint to her principal. C) FINRA should receive a copy of the complaint within 10 business days. D) The firm should immediately respond to the customer.
B) The RR should forward the complaint to her principal.
The U.S. government agency that is responsible for regulating the process by which issuers raise capital is: A) The Federal Deposit Insurance Corporation (FDIC) B) The Securities Exchange Commission (SEC) C) The Internal Revenue Service (IRS) D) The Financial Industry Regulatory Authority (FINRA)
B) The Securities Exchange Commission (SEC) The Securities and Exchange Commission is an independent federal government agency that's responsible for protecting investors, maintaining fair and orderly securities trading markets, and regulating the process by which issuers raise capital in the primary market
Which of the following statements is TRUE regarding the purchaser of a call option? A) The yield on the purchaser's portfolio would increase by purchasing the option. B) The purchaser would limit the amount of money he could lose if the underlying stock declined. C) The purchaser would benefit if the underlying stock declined. D) The purchaser would exercise the option if the stock declined.
B) The purchaser would limit the amount of money he could lose if the underlying stock declined. The maximum loss that a purchaser of an option (call or put) can sustain is the amount of the premium paid. The purchaser of a call option will profit if the underlying stock increases in value and would exercise the call only if the stock had increased. Increasing the yield on a portfolio is a benefit of writing, not purchasing, call options
A corporation declares a 5% stock dividend that's payable on Thursday, October 18. If the record date is Wednesday, October 3, the ex-date for this distribution is: A) Monday, October 1 B) Tuesday, October 2 C) Wednesday, October 17 D) Friday, October 19
B) Tuesday, October 2 The ex-date for small stock dividends (less than 25%) is one business day before the record date. In this case, the determination of the ex-date is the same as if it was a cash dividend.
Three-month and six-month Treasury bills are auctioned by the Federal Reserve Board: A) Daily B) Weekly C) Monthly D) Annually
B) Weekly Three-month and six-month Treasury bills are sold at public auctions each Monday.
Understanding a customer's investment profile is important when a registered person is determining: A) The amount of commission to charge a customer B) Whether an investment is suitable for a customer C) Whether to charge the customer a fee or a markup D) The type of disclosure document to send to the customer
B) Whether an investment is suitable for a customer Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning her investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. Obtaining a customer's investment profile is important when a registered person is determining whether a recommended security or strategy is suitable for the customer
May a brokerage firm place a temporary hold on the transfer of securities? A) Yes, for the account of any investor. B) Yes, for the account of a senior investor. C) No, since this is beyond the scope of SRO rules. D) Yes, if the customer has a margin account.
B) Yes, for the account of a senior investor. FINRA rules permit a brokerage firm to put a temporary hold on the disbursements or transfers of funds and securities, but not on securities transactions. The temporary hold only applies to the account of a specified adult. A specified adult is a person who is age 65 or older or a person who is age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders her unable to protect her own interests
The issuer of a bond has the ability to redeem the entire issue prior to the final maturity date. Which yield would be MOST relevant? A) Yield-to-maturity B) Yield-to-call C) Current yield D) Nominal yield
B) Yield-to-call The yield-to-call represents a bond's yield if it's called or redeemed prior to maturity; however, the yield-to-maturity represents the bond's true yield if it's held to maturity. A bond's nominal yield is its coupon rate or annual return, while a bond's current yield measures what the investor will receive each year based on her (potential) purchase price.
A mutual fund charges a maximum front-end load of 5.50% for purchases of less than $100,000 and 3.50% for purchases of $100,000 but less than $250,000. An individual invests $75,000 in the fund and signs a letter of intent. Prior to the expiration date of the letter, the individual invests another $75,000. What is the total sales charge the individual should pay? A) $7,250 B) $6,750 C) $5,250 D) $8,250
C) $5,250 If a client signs a letter of intent and contributes enough money to receive the discount, she will pay the lower sales charge on the entire amount invested. The total amount invested is $150,000 which is equal to or greater than $100,000. Therefore, the investor will pay a 3.50% sales charge. 3.50% of $150,000 is equal to $5,250.
For how long is a letter of intent effective? A) 30 days B) 90 days C) 13 months D) 36 months
C) 13 months A letter of intent qualifies an investor for a discount that's made available through breakpoints without initially depositing the entire amount required. The letter indicates the investor's intention to deposit the required funds over the next 13 months. The LOI may be backdated for 90 days to include previous purchases.
The current yield on a $1,000 par value 5% bond selling at $800 maturing in 10 years is: A) 5.00% B) 5.60% C) 6.25% D) 8.50%
C) 6.25% The current yield is found by dividing the yearly interest payment of $50 by the market price of $800. This equals 6.25%. The fact that the bond will mature in 10 years is not necessary to find the current yield (but it is needed to find the yield to maturity
A reverse repurchase agreement is sometimes referred to as: A) Federal funds B) Arbitrage C) A matched sale D) A treasury sale
C) A matched sale A reverse repurchase agreement is also referred to as a matched sale and is created when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This activity has the short-term effect of absorbing (removing) funds from the money supply. Federal funds or fed funds are the monies that are borrowed overnight on a bank-to-bank basis
ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a: A) Dealer B) Designated market maker C) Agent D) Underwriter
C) Agent When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer, it is acting as a broker (agent).The client is charged a commission on the transaction. If the firm bought the security for its own account, or sold the security to a client from its inventory, it is acting as a dealer (principal). The client in this case is charged a markup or markdown
An uncle would like to invest for his nephew's college education. Which of the following factors is a benefit of a 529 plan? A) Uniformity of state taxation B) Pretax contributions C) Change of beneficiaries allowed D) No limits on contributions
C) Change of beneficiaries allowed The owner of a 529 plan may change beneficiaries. Contributions are made on an after-tax basis, and are based on state rules, which vary from state to state. Contributions are limited, and vary by state
Funds collected from 12b-1 fees cannot be used to pay for which of the following fund expenses? A) Sales concessions paid to registered representatives B) Printing the fund's prospectus C) Commissions paid for executing trades in the fund's portfolio D) Costs associated with creating the fund's website
C) Commissions paid for executing trades in the fund's portfolio For mutual funds, 12b-1 fees are charged to cover the costs of distributing the shares. This includes sales concessions that are paid to registered representatives (also referred to as trailers), printing the fund's prospectus, and expenses related to creating the fund's website. However, 12b-1 fees are not used to cover the cost of executing trades in the fund's portfolio.
Which of the following is a reduction in the rate of inflation? A) Inflation B) Deflation C) Disinflation D) Expansion
C) Disinflation Disinflation is considered a slowing down in the increase in the level of prices. A significant decline in the general level of prices is referred to as deflation. On the other hand, inflation is an increase in the level of prices. Expansion is the phase of the business cycle during which inflation is a characteristic
If interest rates decline, which of the following securities is likely to have the greatest increase in market value? A) Short-term bonds B) Intermediate-term bonds C) Long-term bonds D) All bonds will experience the same change in market value
C) Long-term bonds When interest rates decline, the bonds with the longest maturities will have the greatest price increase
Which of the following activities is NOT performed by a transfer agent? A) Handling lost, destroyed, or stolen certificates B) Acting as proxy agent C) Maintaining the issuer's ownership register for each issuance of securities D) Acting as the company's paying agent for interest payments on bonds and for cash or stock dividends on equities
C) Maintaining the issuer's ownership register for each issuance of securities
May a brokerage firm place a temporary hold on a securities transaction? A) Yes, for the account of any investor. B) Yes, for the account of a senior investor. C) No, since this is beyond the scope of SRO rules. D) Yes, if the customer has a margin account.
C) No, since this is beyond the scope of SRO rules. FINRA rules permit a brokerage firm to put a temporary hold on the disbursements or transfers of funds and securities, but not on securities transactions. The temporary hold only applies to the account of a specified adult. A specified adult is a person who is age 65 or older or a person who is age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders her unable to protect her own interests.
An Operations Professional is notified by a registered representative (RR) that he has received a written complaint from a customer. The RR informs the Operations Professional that the issue is now rectified and no further action is required. What is the MOST appropriate action for the Operations Professional to take? A) Consider the complaint resolved B) Consider the complaint resolved but notify the principal of the complaint C) Notify the principal of the complaint D) Call the customer to see if the dispute has been resolved
C) Notify the principal of the complaint Registered representatives are not permitted to take action on complaints. The complaint should be forwarded immediately to the principal/supervisor to determine what, if any, action should be taken
If an investor owns Treasury notes, she receives payments: A) At maturity only B) Semiannually only C) Semiannually and at maturity D)Monthly and at maturity
C) Semiannually and at maturity Treasury notes and Treasury bonds pay interest semiannually, and the investor receives the principal (par value) repayment at maturity
Blue Sky laws are established under which of the following? A) The Securities Act of 1933 B) The Securities Exchange Act of 1934 C) The Uniform Securities Act D) The Code of Procedure
C) The Uniform Securities Act Blue Sky laws (state regulations) are established under the Uniform Securities Act (USA). The USA is a model law that individual states use as a template for their specific laws
The main difference between a registered exchange-traded REIT and a registered nontraded REIT is: A) The type of assets in which they are permitted to invest B) The types of disclosures they are required to make to investors C) The amount of liquidity each of the securities has D) The tax treatment of each of the securities
C) The amount of liquidity each of the securities has Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. Many nontraded REITs may be redeemed only by selling the shares directly back to the REIT, subject to many limitations set by the REIT. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors
Which of the following statements is NOT TRUE concerning the opening an account for a new client? A) The RR may NOT open the account using a P.O. box as an address. B) The RR may send mail to a P.O. box. C) The client must sign the new account form. D) The RR must make an effort to obtain the client's tax ID number, such as a Social Security number.
C) The client must sign the new account form. The untrue statement is that the client must sign the new account form. Although many firms have internal rules which require the customer's signature, FINRA doesn't require it. Each of the other statements are true
When selling a security for a customer, all of the following items MUST be included on the sell order ticket, EXCEPT: A) The number of shares or par value B) The location of the security C) The customer's Social Security number D) If the account is discretionary, whether discretion was exercised
C) The customer's Social Security number An sell order ticket doesn't include the customer's Social Security number. An order ticket must include the customer's account number, the number of shares or par value (for a bond), a description of the security, limitations (e.g., limit, stop), and whether it is a buy or sell order. If it's a sell order, the location of the security (long or short) must be indicated. For discretionary accounts, the ticket must indicate whether discretion was exercised.
The fluctuations in the value of a variable annuity will correspond with the fluctuations in the: A) Dow Jones Industrial Average B) Value of the index or average on which the payout is based C) Value of the securities held in the separate account of the annuity D) Cost of living index
C) Value of the securities held in the separate account of the annuity The fluctuations in the value of a variable annuity will correspond with the fluctuations in the value of the securities held in the separate account of the annuity. This is the securities portion of the annuity
Within a brokerage firm, a registered representative solicits customers to purchase securities, another person works in the firm's cashier's department as a clerk, a managing director supervises the research department, and a consultant has been brought in to work on an accounting project. Which of these persons is NOT required to be fingerprinted? A) The registered representative B) The clerk C)The consultant D) The managing director
C)The consultant Fingerprints are required of any securities industry person who is engaged in the sale, recommendations, or transactions of securities, or any person who regularly has access to the keeping, handling, or processing of securities, monies, or the original books and records relating to securities or monies. In addition, any person who has direct supervisory responsibility over any persons who are engaged in these activities is required to comply with these regulations. The consultant is neither engaged in the sale or handling of securities nor responsible for the firm's books and records and is therefore not required to be fingerprinted.
The net asset value (NAV) of an open-end investment company is $22.20 and its sales charge is 8%. What is the public offering price? A) $20.42 B) $22.20 C) $23.98 D) $24.13
D) $24.13 The public offering price (POP) or asked price is $24.13. To find the POP, the net asset value is divided by the complement of the sales charge, as follows: NAV / (100% - sales charge) $22.20 / (100% - 8%) $22.20 / 92% $22.20 / 92% = $24.13 Remember, a mutual fund's sales charge is always expressed as a percentage of the POP. For this reason, it is incorrect to multiply the sales charge (8%) by the NAV ($22.20).
Which of the following is NOT included in a list of institutional investors? A) A hedge fund B) A public pension plan C) An insurance company D) An accredited investor
D) An accredited investor Institutional investors are typically large entities that pool their money to purchase securities. Institutional investors include banks, insurance companies, pension plans, endowments, and hedge funds. Some accredited investors may also be institutional investors, but not all. Under Regulation D, the definition of an accredited includes individuals who meet either one of the following two criteria: Have a net worth of at least $1 million (excluding their primary residence) or, Have gross annual income of at least $200,000 (or $300,000 combined with a spouse) for each of the past two years, with the anticipation that this level of income will continue
Which of the following is the rate that commercial banks charge on loans to broker-dealers for margin purposes? A) Prime rate B) Discount rate C) Federal funds rate D) Call rate
D) Call rate The call rate is what commercial banks charge on loans to broker-dealers for margin purposes. The prime rate is the rate that commercial banks charge their best corporate clients. The discount rate is what the Federal Reserve charges when lending to member banks. The federal funds rate is the rate charged on overnight loans between member banks
In reviewing prices for a mutual fund, an investor notices that the Beacon Fund has two listings, one for Class A shares and the other for Class B shares. The distinction between the two classes of shares would most likely be: A) Class A shares are oriented toward short-term trading, while Class B shares have a long-term perspective B) Class A shares should be purchased by income-oriented investors while Class B shares are for those seeking capital appreciation C) Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers D) Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge
D) Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge The difference between Class A and Class B shares is normally that the A shares have a front-end sales charge while the B shares have a contingent deferred sales charge (CDSC). A CDSC is deducted only when the investor redeems shares. Generally, if the investor holds the B shares for a sufficient period of time, there is no sales charge deducted upon redemption.
Industrial production is considered what type of economic indicator? A) Leading B) Lagging C) Cyclical D) Coincident
D) Coincident Economists separate indicators into leading, coincident, and lagging economic indicators. Industrial production moves at the same time as the overall economy and is a coincident indicator
An individual wants a real estate investment that offers tax benefits and provides the ability to share directly in the earnings of the business. Which of the following BEST meets those objectives? A) ETN B) REIT C) ETF D) DPP
D) DPP Direct participation programs (DPPs) can be businesses that invest directly in real estate programs. Investors in these programs are considered owners of the business. These owners benefit from various tax benefits (tax deductions and credits) and also from the ability to share directly in the revenues. REITs invest in real estate properties and/or debt, but deductions and revenues don't flow through the trust. ETNs and ETFs are products that trade like debt or equity investments
Which of the following statements describes the greatest risk associated with mortgage-backed securities? A) Borrowers might default on their mortgage payments B) The market for mortgage-backed securities is illiquid C) The market price of the bonds might fall due to a rating downgrade D) Falling interest rates might accelerate early repayment of principal
D) Falling interest rates might accelerate early repayment of principal Mortgage-backed securities are subject to prepayment risk. The early return of principal would then need to be reinvested when rates are low. Many mortgages that underlie mortgage-backed securities are backed by government guarantees or private mortgage insurance, which insulates many holders from defaults on the underlying mortgages.
The interest rate that fluctuates the most is the: A) Prime rate B) Broker loan rate C) Discount rate D) Federal funds rate
D) Federal funds rate Short-term rates fluctuate more than long-term rates. The federal funds rate, which is the rate of interest one bank charges another bank for the use of excess reserves for short-term periods (usually overnight), fluctuates the most since it has the shortest maturity. Although long-term bond prices fluctuate more than short-term bond prices, the yields of short-term securities fluctuate more than those for long-term securities
Which of the following choices helps the U.S. balance of payments? A) U.S. corporations building plants abroad B) Lending money to foreigners at high interest rates C) U.S. investment in foreign securities D) Foreign investment in the U.S.
D) Foreign investment in the U.S. Foreign investments in the U.S. will direct money into the country, helping the U.S. balance of payments
Which of the following statements is NOT TRUE about a company's Form 10-K? A) It contains financial information about the company. B) It is an annual filing. C) It must be forwarded to the company's shareholders. D) It allows shareholders to vote without attending the annual meeting.
D) It allows shareholders to vote without attending the annual meeting. A Form 10-K is an annual filing that provides a company's financial information. Form 10-Ks must be forwarded to the company's shareholders. The form that allows shareholders to vote without attending the annual meeting is referred to as a proxy.
Which of the following is NOT a characteristic of preferred stock? A) It has a fixed dividend B) The board of directors must declare the dividends C) It has a dividend that is not guaranteed D) It carries voting rights
D) It carries voting rights The board of directors must declare dividends for both common and preferred stock. Neither common nor preferred stockholders are guaranteed a dividend. Preferred stock normally has a fixed dividend. Preferred stock does not have voting rights, only common shares may vote.
Which of the following is NOT a type of unsystematic risk? A) Political risk B) Business risk C) Credit risk D) Market risk
D) Market Risk Market risk is a form of systematic risk and cannot be avoided by securities investors. For example, if the overall stock market is declining, it will negatively affect all of the stocks in the market. Conversely, unsystematic risk is able to be reduced through appropriate diversification
If an investor's portfolio is significantly weighted with mortgage-backed securities, she is MOST concerned with: A) Credit risk B) Political risk C) Legislative risk D) Prepayment risk
D) Prepayment risk Like most debt instruments, mortgage-backed securities (MBSs) are subject to interest-rate risk (i.e., the risk that a debt security's value will fall as interest rates rise). However, MBSs are also subject to risk when interest rates fall. Falling rates cause an increase in prepayments on the underlying mortgages, and this money must thereafter be reinvested in new, lower coupon securities. This risk is referred to as prepayment risk. During a period of rising interest rates, prepayment risk is less of a factor and opportunity risk becomes more important. Since the existing investments will be earning less than new MBSs, the existing securities could be liquidated at a loss and new MBSs could be purchased to take advantage of their higher return.
An IRA that allows for non-deductible contributions, limits the amount able to be contributed to the lesser of 100% of earned income or $5,500 per year, and allows for qualified distributions to be taken tax-free after age of 59 1/2 is a/an: A) SEP-IRA B) Traditional IRA C) Education IRA D) Roth IRA
D) Roth IRA The only IRA that allows for tax-free distributions after the age of 59 1/2 is a Roth IRA. The maximum contribution to an Coverdell Education IRA is $2,000 per year, whereas $5,500 is the maximum annual contribution to either a Roth IRA or traditional IRA
Which of the following statements is NOT TRUE regarding the Uniform Gifts to Minors Act? A) Only one custodian is allowed for each account B) The minor is responsible for all taxes due on dividends and interest received from securities held in the account C) Only an adult may be a custodian D) Securities must be held in the name of the brokerage firm
D) Securities must be held in the name of the brokerage firm All the choices regarding the Uniform Gifts to Minors Act are true except securities must be held in the name of the brokerage firm (street name). All securities are registered in the name of the custodian for the minor
A registered representative has requested a loan from an immediate family member who is also a customer of the broker-dealer that employs the RR. Which of the following statements is TRUE regarding this situation? A) Her broker-dealer is required to approve the loan. B) She is required to notify her firm about the loan. C) She is required to notify FINRA about the loan. D) She is not required to notify her firm about the loan.
D) She is not required to notify her firm about the loan. Registered individuals may neither borrow money from, nor lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures which permit such activity and satisfying at least one of the following provisions: The customer and the registered person are immediate family members. The customer is a financial institution that's regularly involved in the business of extending credit or providing loans. Both parties are registered with the same firm. The loan is based on a personal relationship between the customer and the registered person. The loan is based on a business relationship that's independent of the customer-broker-dealer relationship. If the loan is based on provisions 1 or 2 (borrowing from immediate family members or from a financial institution whose business is loaning money), firm notification or firm approval is not required. However, if the conditions indicated in provisions 3, 4, or 5 apply (e.g., borrowing from a neighbor), the firm must approve the lending activity prior to the execution of the loan.
The federal securities regulation that requires disclosure by issuers offering securities to the public is: A) The Investment Advisers Act of 1940 B) The Securities Investor Protection Act of 1970 C) Securities Exchange Act of 1934 D) The Securities Act of 1933
D) The Securities Act of 1933 The main focus of the Securities Act of 1933 is the primary market where securities are sold by issuers. The Act demands that investors be provided with full and fair disclosure by issuers of securities so that they're able to make informed investment decisions. The Act also provides specific rules for the conduct of both issuers and the investment bankers (underwriting firms) that assist issuers in raising capital
Which of the following statements is NOT TRUE for a bond trading at a premium? A) The bond will trade with the current yield lower than the nominal yield. B) The bond will trade at a basis below its coupon rate. C) The bond will have a current yield that is higher than the yield basis. D) The basis and coupon will be identical.
D) The basis and coupon will be identical. Basis is a different way of saying yield to maturity. In the case of a bond trading at a premium, the nominal yield (coupon) will be higher than the current yield and the yield to maturity (basis). Additionally, the current yield will be larger than the yield to maturity
A person has had a brokerage account with an online securities trading firm, but has just been hired by a broker-dealer. Which of the following statements is TRUE? A) The person is not permitted to maintain the account. B) The person is only permitted to maintain the account if a principal of the employing firm provides written approval for each order prior to the order being entered. C) The person is permitted to maintain the account if his employer provides written consent within three months of being hired. D) The person is permitted to maintain the account if his employer provides written consent within 30 days of being hired.
D) The person is permitted to maintain the account if his employer provides written consent within 30 days of being hired. If an employee had opened an account prior to the time that he became associated with a broker-dealer, the account may be maintained if he obtain his employer's written consent within 30 days of the beginning of his employment. Additionally, the employee is required to provide written notification to the executing firm of his employment with another broker-dealer
When analyzing a mutual fund's expenses, an analyst does NOT consider: A) The management fees charged by the investment adviser B) The fees charged by the fund's custodian C) The fund's expense ratio D) The sales load charged to buy fund shares
D) The sales load charged to buy fund shares When analyzing a mutual fund's expenses, an analyst is concerned about the amount of expenses as compared to the amount of money managed by the fund. This comparison is made by calculating the fund's expense ratio (operating expenses divided by total net assets). The operating expenses include management fees (which is usually the largest expense) and the fee paid to the fund's custodian. Total net assets are the fund's assets minus liabilities. Sales charges are not considered expenses of the fund.
Which of the following securities is exempt from state taxes? A) Corporate stock B) Convertible bonds C) Federal National Mortgage Association (FNMA) bonds D) Treasury notes
D) Treasury notes All of the choices listed are subject to state taxes except Treasury notes, which are U.S. government obligations and are subject to federal taxes, but exempt from state taxes.
