Mock Exam 4 (part 2)

Which of the following issues only common stock? A) A closed-end management investment company B) A face-amount certificate company C) An equity unit investment trust D) An open-end management investment company

An open-end management investment company An open-end (mutual fund) management investment company may only issue redeemable common stock. A unit investment trust offers units of beneficial ownership. A closed-end management investment company may also issue bonds and preferred stock, while a face-amount certificate company offers a contract, as opposed to units or shares.

Which of the following securities provides U.S. investors with a way to gain exposure to the common stock of a foreign issuer?

ADR

Which of the following terms best describes a corporate debt instrument secured by a pledge by the issuer of property that consists of stocks or bonds of other corporations? A) Collateral trust certificate B) Debenture C) Equipment trust certificate D) Unit investment trust

Collateral trust certificate Collateral trust bonds or certificates are issued by corporations that own securities of other companies as investments. The certificates are secured by a pledge of those securities as collateral.

Common dividends may be A) declared or suspended by the board of directors (BOD), with increases and reductions decided by the shareholders. B) declared, increased, reduced, or suspended by the shareholders. C) declared, increased, reduced, or suspended by the board of directors (BOD). D) declared or increased only by the board of directors (BOD).

declared, increased, reduced, or suspended by the board of directors (BOD). Common dividends may be declared, increased, reduced, or suspended at the discretion of the BOD. Shareholders have no vote on these dividend matters.

Distributions from IRAs are taxed at A) long-term capital gains rate on the amount of the distribution that exceeds the amount contributed. B) ordinary income tax rates on the full amount of the distribution. C) ordinary income tax rates on the amount of the distribution that exceeds the amount contributed. D) long-term capital gains rate on the full amount of the distribution.

ordinary income tax rates on the full amount of the distribution. Because no taxes were paid on the amount deposited, the full amount is taxable at distribution, and even though some of the distribution is from capital gains, the whole amount is taxed at the ordinary income tax rate.

An investor holds shares of a manufacturing company where disposal of the by-products produced during the manufacturing process is necessary. The Environmental Protection Agency (EPA) updates the rules applicable to disposing of the product. For the investor, these changes present a form of A) financial risk. B) political risk. C) regulatory risk. D) liquidity risk.

regulatory risk. Changes in the regulatory climate or specific rules that might impact how a company operates or its ability to do so profitably are recognized as regulatory risk.

All of the following would be secondary market transactions except A) securities bought and sold on the NYSE. B) securities bought and sold on the OTC. C) securities sold on both the OTC and NYSE. D) securities sold to the public by the issuer.

securities sold to the public by the issuer. Exchanges (like the NYSE and the OTC market) are part of the secondary market. The primary market is the issuer selling to the public.

Blaine Smith has owned XYZ stock for several years and believes it is time to take his profit and invest that money in another stock. He should A) sell XYZ to close. B) sell XYZ to open. C) buy XYZ to open. D) buy XYZ to close.

sell XYZ to close. When a client owns a stock and wants to get out of that position, he should sell the stock in a closing transaction.

Intraday price changes due to normal market forces would be found with I. closed-end fund shares. II. exchange-traded fund shares. III. hedge fund shares. IV. open-end (mutual) fund shares. A) III and IV B) I and IV C) I and II D) II and III

I and II Both closed-end funds and ETFs trade in the open market and are priced by supply and demand. Open-end (mutual) funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday.

Which of the following would constitute improper use of a customer's securities or funds? I. Agreeing to a stock purchase the representative thinks is beyond the client's means II. Selling a bond at the client's insistence during a period of high interest rates III. Lending securities for a short sale when the client has agreed to it on the phone IV. Borrowing a client's funds without permission, though it will be repaid the same day

III and IV Though a customer may be ill-advised, complying with it does not constitute improper use. To lend securities without a signed loan consent agreement does constitute improper use, as does borrowing the client's funds without permission of the client, no matter how briefly the funds will be held.

If left unexecuted, a good til cancel (GTC) order will automatically be canceled when? A) On the cancel date specified by the customer at the time the order is entered B) On the last business day of June and the last business day of December C) On the last business day of April and the last business day of October D) On the first business day of April and the first business day of October

On the last business day of April and the last business day of October GTC orders are valid until executed or canceled. Any GTC orders left unexecuted are automatically canceled on the last business day of April and the last business day of October. If the customer wishes to have the order remain working beyond those specific days, the customer must reenter the order.

Money laundering activities are most easily caught during which phase?

Placement Illicit funds are most susceptible to detection during the placement phase, where the funds first enter the money laundering scheme.

Which of the following refers to prolonged periods of slow or little economic growth, usually accompanied by high unemployment? A) Stagflation B) Deflation C) Trough D) Stagnation

Stagnation Economic stagnation refers to prolonged periods of slow or little economic growth, usually accompanied by high unemployment.

A prospectus must be delivered to customers following a transaction in all of the following except

ETFs ETFs make final and summary prospectuses available, for example on a website, for viewing or downloading but there is no requirement to send one to those who trade the exchange-traded fund. Publicly traded closed-end funds are not obligated to deliver a prospectus when traded in the secondary market place.

A stock trade took place on Tuesday, July 2. When would regular way settlement normally take place?

Friday, July 5 Regular way settlement for a stock trade is T + 2 (trade date plus two business days). This would normally make settlement for this transaction Thursday July 4, but because July 4 is not a business day (national holiday), regular way settlement would have to be Friday, July 5.

If a prospectus is being used to close a mutual fund sale, it must be given to the investor A) always before the sales presentation begins. B) within three business days of purchase. C) within five business days of purchase. D) before or during the sales presentation.

before or during the sales presentation. The mutual fund purchaser must receive a prospectus before or during any sales solicitation or presentation. Additionally, sales literature sent out to prospective customers is considered a sales solicitation and must therefore be accompanied by a prospectus.

Shares to sell short have been located in order to be borrowed. Once sold short, these shares will be known as A) uncovered. B) closed. C) naked. D) covered.

covered Selling short requires borrowing or locating the shares to be borrowed first. These shares, because they have already been located to be borrowed, are known to be covered.

Your client, Mary Quinn, wants to place an order to sell a stock in her portfolio when the current price is 45, but she is only willing to sell if she can sell for at least 47. Which order should she place? A) A sell limit order B) A market order C) A sell stop order D) A sell stop limit order

A sell limit order Sell limit orders are placed above the current market price and fill at the stated price or higher. Market orders fill at the next available price. Sell stop and sell stop limit orders are not triggered until the market drops to or through the stop price.

Portfolio diversifying might be used to reduce which of the following risks? A) Market risk B) Inflation risk C) Interest-rate risk D) Business risk

Business risk Nonsystematic risks can be reduced using diversification. These would include business, financial, credit, and liquidity risk (among others). Market, inflation, and interest-rate risks are types of systematic risks that are considered nondiversifiable because they impact all investments and, therefore, cannot be diversified away or mitigated simply by diversifying.

A registered representative has left a firm and joined another. The new firm must obtain a copy of the Form U-5 filled out by the old firm. Where might the new firm obtain a copy of the form? I. From the new employee II. From the Securities and Exchange Commission (SEC) III. From Financial Industry Regulatory Authority (FINRA)'s Central Registration Depository (CRD) IV. From the representative's former employer

I and III Copies of a new employee's Form U-5 may be obtained from the employee, or from FINRA's Central Registration Depository (CRD). Whichever the source, the firm must obtain the copy within 60 days of filing the new Form U-4 for the new employee.

For Treasury bills, which of the following are true? I. T-bills are issued at a discount to par. II. T-bills have maturities of 1-10 years III. Most T-bill issues are callable and convertible. IV. T-bills are a direct obligation of the U.S. government.

I and IV T-bills are issued at a discount to par, are six months or less to maturity, and are a direct obligation of the U.S. government. Callable and convertible features are those that should be associated with corporate issues not government issues.

Which of the following are characteristics of a revocable living trust? I. It is established before the grantor dies. II. The grantor can change beneficiaries. III. The grantor can add or remove items from the trust. IV. The grantor is subject to tax on income that remains in the trust.

I, II, III, and IV In a revocable living trust the grantor has complete control over the trust while alive and because of this, the grantor is also subject to any tax implications of the trust.

Which type of shares allow the investor to buy and sell the shares at NAV and have a 12b-1 fee of 0.25% or less? A) No load B) Class C shares C) Class B shares D) Class A shares

No load No load funds have no sales charge and are limited to a 12b-1 fee of 0.25% annually. Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (Contingent deferred sales charge, or CDSC). Class A shares charge an upfront load.

Regarding capital gains, which of the following is true?

Short-term gains are those realized on positions held for 12 months or less. Profits on positions held 12 months or less are considered short-term gains. For those positions held longer than 12 months, the gains are considered long term and taxed at a more favorable rate.

If an officer of a bank with the authority to purchase and sell securities on behalf of the bank wants to purchase new issues, which of the following statements is true? A) The officer may purchase a new issue because anyone is allowed to purchase new issues. B) The officer may not purchase a new issue unless the amount he wishes to purchase is considered small in relation to the total offering. C) The officer may not purchase a new issue because he is considered a restricted person. D) The officer may purchase a new issue because no banking rules prohibit it.

The officer may not purchase a new issue because he is considered a restricted person. Under the rules regarding the purchase of new issues, bank officers would generally be characterized as restricted persons. They may not, therefore, purchase new issues.

An investor purchased an MJS Corporation 6% 20-year bond at issue for $950. Two years later, the investor sold the bond for $925. This investor experienced A) a $25 capital loss. B) a $25 interest loss. C) a $25 return on investment. D) a $925 return on investment.

a $25 capital loss. If a security is sold for less than the original purchase price, the difference is called a capital loss. This would apply to both equity and debt securities.

A convertible feature for a corporate bond allows A) a bondholder to convert a debt instrument into securities that give the investor ownership rights. B) a bondholder the opportunity to exchange a debt instrument for another debt instrument with shorter maturity. C) an issuer the ability to convert its debt obligations over to voting stockholders who would then hold the debt paper. D) an issuer to convert its debt securities to those offered by another issuer.

a bondholder to convert a debt instrument into securities that give the investor ownership rights. Corporate bonds with convertible features allow the bondholders to convert the debt obligation they hold into shares of stock. Stock gives the holders an equity position in the company with ownership rights.

Mr. Smith enters a trade in a stock at the same time as Mr. Jones, who has inside information regarding that company. Mr. Smith is considered A) an inside tipper. B) an informer. C) an outside tippee. D) a contemporaneous trader.

a contemporaneous trader. Someone who enters into a transaction at the same time as someone else who has and may be acting on inside information is known as a contemporaneous trader. Contemporaneous traders may sue persons who have violated insider trading regulations, and suits may be initiated up to five years after the violation has occurred.

A mutual fund company may offer noncash compensation to associates of broker-dealer firms in the form of attendance at a meeting or convention, provided that A) a record of compensation and meeting details is kept by the attendee member's firm. B) attendance is conditional upon agreement to a predetermined sales target. C) the meeting is held for the purpose of entertainment only and not for business purpose. D) expenses of spouses or other guests of attendees are also met.

a record of compensation and meeting details is kept by the attendee member's firm. The firms whose associates attend the meeting must keep records of all noncash compensation and details of what went on at the meeting. Noncash compensation of this type will inevitably be at least indirectly business-related, but must not be conditional upon agreeing to meet some sales goal. Side trips and expenses of guests must be met by those in attendance, not the host of the meeting.

To meet the requirements of the know your customer rule, a registered representative would be required to gather information on all of the following except A) what the customer's objectives are. B) the customer's financial and nonfinancial investment considerations. C) all of the essential facts about the customer related to the investment. D) if the customer graduated from college.

if the customer graduated from college. The investment objectives of the customer is critical to making a recommendation, as well as any other financial or nonfinancial considerations related to the investment. The registered representative should know all the essential facts about the customer. Graduation from college is not a requirement.

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

individual owning 5% of a member firm. Rules prohibit member firms from selling public offering stock in equities to any account in which restricted persons are beneficial owners. Restricted persons include Financial Industry Regulatory Authority (FINRA) members, employees of member firms, finders and fiduciaries acting on behalf of the underwriters, portfolio managers, and any person owning 10% or more of a member firm. Also included are the immediate family members of any restricted persons.

All of the following are true regarding customer account statements except A) monthly statements need to be sent if the account activity is the receipt of interest or dividends. B) customer statements must be sent at least quarterly, activity or not. C) customers must be alerted to report any inaccuracies or discrepancies promptly. D) customer statements containing penny stocks must be sent monthly, even if no activity occurred in the account.

monthly statements need to be sent if the account activity is the receipt of interest or dividends. Though most firms send a monthly statement, the requirement is that a BD send statements at least quarterly. In any month an account contains penny stocks, a statement is required to be sent. All statements sent require notice that inaccurate information should be reported promptly.

All of the following associated persons engaged in the investment banking and securities business are considered registered representatives, except A)someone who solicits or otherwise conducts securities business. B) someone who trains others to supervise, solicit, or conduct business in securities. C) someone who serve on the board of directors. D) someone who supervises, solicits, or conducts business in securities.

someone who serves on the board of directors. All associated persons engaged in the investment banking and securities business are considered registered representatives, including any assistant officer who does not function as a principal; any individual who supervises, solicits, or conducts business in securities; and any individual who trains people to perform functions in those capacities. See the glossary for definitions of associated persons and registered representatives.

The economy is showing that employment is low, there is little consumer demand, and loans for expansion and retooling are way down, showing a lack of business activity. Yet prices for consumer goods are still rising. Economists would call this a period of A) deflation. B) stagflation. C) inflation. D) stagnation.

stagflation Inflation is characterized by a rise in prices for goods and services. Stagnation is characterized by high unemployment and lack of growth and business activity. When these occur simultaneously, economists refer to these times as periods of stagflation.

The maximum gain on a short put is A)strike price - premium. B) the premium. C) the strike price. D) strike price + premium.

the premium. The maximum gain on any short option position is the premium received. The seller of the option is hoping the contract goes out of the money and expires unexercised.

The party who is short an option contract is known as A) the party with the right to exercise and pays the premium. B) the party with the right to exercise and receives the premium. C) the writer and pays the premium. D) the writer and receives the premium.

the writer and receives the premium. The party who is short an option contract is the seller of the contract. This party is known as the writer of the contract and receives the premium when the contract is sold. Buyers have the right to exercise—that is what they are paying the premium for—and when exercise occurs, the sellers of the contract are obligated to fulfill the terms of the contract.

Mary Alice McVey, a registered representative with a Financial Industry Regulatory Authority (FINRA) member broker-dealer, has recently remodeled her home and now has an area with a private entrance that she would like to use instead of commuting each day to her office 20 miles away. Under FINRA rules A) this would be permitted with FINRA's approval. B) this would be permitted with FINRA's approval, but she would have to work at least one day per week in the branch in order to ensure proper supervision. C) she would only be permitted to see existing customers at her home. D) registered representatives may not operate out of their homes.

this would be permitted with FINRA's approval. FINRA rules provide for the ability of registered representatives to operate out of their residence in what is known as a home office. Approval from FINRA is required and the same rules that apply to any branch office would apply here.

An investor interested in quarterly income should invest in A) corporate bonds. B) Treasury bonds. C) utility company stock. D) STRIPS.

utility company stock. Utility stocks generally pay quarterly dividends, whereas corporate and Treasury bonds pay interest semiannually. STRIPS pay at maturity.

The Specifically Designated Nationals (SDN) list must be checked

when opening a new account for an individual or other entity. The SDN list must be checked for each new customer when opening an account. There is no requirement to check the list once the account has been opened.