SIE- Chapter 1-5
$______ is the par value for bonds.
$1,000 is the par value for bonds.
Jim owns a 5% bond maturing on 6/1/2022. What would Jim receive at maturity if the bond pays interest semi-annually?
$1,025, which represents the $1,000 principal value plus the final coupon payment of $25
$______ is normally the par value for preferred stock.
$100 is normally the par value for preferred stock.
ABC hasn't paid dividends in four years. If declared in year 5, what will a 3% cumulative preferred shareholder receive?
$15 ($100 x 3% = $3 per year x 5 years of dividends)
What amount of coverage is provided by FDIC?
$250,000 per depositor, per bank
ABC hasn't paid dividends in four years. If declared in year 5, what will a 3% non-cumulative preferred owner receive?
$3. Since the shares are non-cumulative, ABC is only required to pay the full amount for year 5.
What are the two general types of Treasuries?
1) Marketable (negotiable) and 2) Non-marketable (non-negotiable)
What are the two methods by which municipal bonds are sold in the primary market (as new issues)?
1) Negotiated sale and 2) Competitive sale
List the two types of shares that may be sold under Rule 144.
1) Restricted (unregistered) stock 2) Control stock
List the four categories of FINRA rules.
1. Conduct Rules 2. Uniform Practice Code 3. Code of Procedure 4. Code of Arbitration
What is the maturity range of a T-Note?
2 to 10 years
What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
To be considered an investment adviser, what are the three parts of the ABC test?
A - Advice, B - Business, C - Compensation
Define a prime broker.
A BD that clears and settles trades effected by one or more executing brokers at the direction of the customer
A BD that does not hold a customer's cash or securities is known as a _____________.
A BD that does not hold a customer's cash or securities is known as a non-carrying firm.
Define an introducing BD.
A BD using another BD to handle cash and securities, trade execution, reporting, clearing, and confirmation
What is a suitable investment for a conservative client seeking monthly income?
A GNMA Fund, since income is typically paid monthly
A Nasdaq-listed stock trades in the __________ market.
A Nasdaq-listed stock trades in the secondary market.
What security helps to finance foreign trade?
A banker's acceptance (BA)
A bond backed by a charge to benefiting property owners is called a __________________________.
A bond backed by a charge to benefiting property owners is called a special assessment bond (e.g., water/sewer system).
A bond backed by machinery or rolling stock is called a(n) ______________________.
A bond backed by machinery or rolling stock is called a(n) Equipment Trust Bond.
What is a guaranteed bond?
A bond that's secured by another corporation's guarantee that it will pay interest and principal (if necessary).
A bond trading at a price above par is a ____________ bond.
A bond trading at a price above par is a premium bond.
A bond trading at a price below par is a __________ bond.
A bond trading at a price below par is a discount bond.
A bond trading at a price of $1,000 is a ______ bond.
A bond trading at a price of $1,000 is a par bond.
A ______ is any person that executes ______ transactions in securities for the account of others.
A broker is any person that executes agency transactions in securities for the account of others.
What is a member firm?
A broker-dealer that is a member of FINRA
A competitive bid placed at a Treasury auction will indicate both ___________ and _________.
A competitive bid placed at a Treasury auction will indicate both quantity and price.
A corporation that issues convertible bonds is borrowing money at a _______ rate.
A corporation that issues convertible bonds is borrowing money at a lower rate (convertibles pay lower interest rates).
What is a dark pool?
A dark pool is a place for large institutional investors and high-frequency traders to trade directly with one another.
A _______ is any person that executes ________ transactions in securities for its own account.
A dealer is any person that executes principal transactions in securities for its own account.
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
What is a clearing firm?
A firm that is responsible for the efficient confirmation, settlement, and delivery of securities transactions
Describe callable preferred stock.
A form of preferred stock that the issuer can repurchase at a fixed price; it typically offers a higher dividend.
A _____ call is a situation where an issuer redeems an entire bond issue before maturity.
A full call is a situation where an issuer redeems an entire bond issue before maturity.
A _______ period is a length of time during which shareholders and insiders are prohibited from selling their shares.
A lock-up period is a length of time during which shareholders and insiders are prohibited from selling their shares.
Describe a T-STRIP.
A long-term (greater than one year) zero-coupon bond that's backed by the full faith and credit of the U.S. Treasury.
Define wrap account.
A managed account that charges clients an annual fee to cover trading, research, and advisory services
A _________ _______ is a type of advisor that provides advice either to a state, county, or city.
A municipal advisor is a type of advisor that provides advice either to a state, county, or city.
What is a stock legend?
A notice on stock certificates stating that selling is restricted unless the shares are SEC-registered or exempt
Define the term dealer.
A person engaged in the business of buying securities for, and selling securities from, his own account
What is a market maker?
A person who enters quotes and stands ready to buy and sell securities for his own account on a regular basis
What are the Pink Sheets?
A real-time electronic quotation system for OTC equities
Describe an asset backed security.
A security whose value and income are collateralized by group of assets, usually bank receivables (e.g. mortgages).
Explain a prime-brokerage arrangement.
A situation in which multiple BDs execute a client's trades and report them to one independent BD for settlement
A __________________ is a revenue bond backed by one specific tax.
A special tax bond is a revenue bond backed by a specific tax (e.g., bonds issued for highway repair backed by gas tax)
A type of maturity where all bonds mature on one specific date is called a _______ bond.
A type of maturity where all bonds mature on one specific date is called a term bond.
If a AA rated bond is downgraded by two notches, what is its new rating?
A+
What is the highest credit rating?
AAA for S&P and Fitch, and Aaa for Moody's
What are some examples of rolling stock used to back a bond offering?
Airplanes, trucks, railroad cars
All winners of a Treasury auction will ultimately pay the ______ price of the ________ competitive tenders.
All winners of a Treasury auction will ultimately pay the lowest price of the accepted competitive tenders.
What instruments are used to facilitate trading of foreign securities in the U.S.?
American Depositary Receipts (ADRs)
What security helps clients to indirectly buy foreign shares?
An American depository receipt (ADR)
An RR's employer is referred to as a ________________.
An RR's employer is referred to as a Broker-Dealer (BD).
Describe a wrap account.
An account that charges the client a single fee that covers transaction execution and account management
What system is used for the issuance of Treasury securities?
An auction
What is the general definition of a QIB?
An entity that owns and invests on a discretionary basis at least $100 million in securities of unaffiliated issuers
An investor who sells a bond between its coupon payments is entitled to _______ interest for the time he owned the bond.
An investor who sells a bond between its coupon payments is entitled to accrued interest for the time he owned the bond.
What is forced conversion?
An issuer calls bonds at a point where the stock is worth more than the bond's call price.
What does ownership of a GNMA pass-through certificate represent?
An undivided interest in a pool of residential mortgages
What are T-STRIPS?
Any T-Note/T-Bond where a BD has stripped the interest and principal payments to sell separately as zero-coupons
Define the term broker.
Any person engaged in the business of effecting transactions in securities for the account of others
Who is subject to The Insider Trading Act?
Anyone who misuses material non-public information
At a Treasury auction, __________________ bids are awarded first.
At a Treasury auction, non-competitive bids are awarded first.
How often will VRDOs adjust their interest rate?
At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.
__________ stock is the amount of stock a corporation is legally permitted to issue.
Authorized stock is the amount of stock a corporation is legally permitted to issue.
Who enforces MSRB rules?
BD Enforcement: SEC or FINRA and Bank Dealer Enforcement: FRB, FDIC, or the Comptroller of the Currency
BD employees who are involved in the investment banking and securities business are called ____________________________.
BD employees who are involved in the investment banking and securities business are called registered representatives.
Identify the acronym: BA
Banker's Acceptance
_________ stocks are associated with major companies that have records of high earnings and dividend payments.
Blue-chip stocks are associated with major companies that have records of high earnings and dividend payments.
Bond interest is stated ___________ and paid ________________.
Bond interest is stated annually and paid semi-annually.
Bondholders are also referred to as ____________.
Bondholders are also referred to as creditors.
______________ are considered creditors of a company.
Bondholders are considered creditors of a company.
What does a put feature on a bond allow?
Bondholders may put (redeem) the bond back to the issuer prior to maturity.
For what types of securities is a trustee required?
Bonds
Bonds rated BB (Ba) or lower are considered _______________________ bonds.
Bonds rated BB (Ba) or lower are considered speculative or junk bonds.
Bonds rated ___________ and higher are considered investment grade.
Bonds rated BBB (for S&P and Fitch) or Baa (for Moody's) and higher are considered investment grade.
How do shareholder's typically inspect their company?
By reviewing the annual and quarterly reports that are distributed by the corporation
What actions may the hearing panel take regarding rule violations?
Censure, fine, suspension, request to requalify, or expulsion of the respondent
What services does the Depository Trust and Clearing Corporation (DTCC) provide to its members?
Clearing, settlement, and information services
Identify the acronym: COP
Code of Procedure
________________ is short-term, unsecured corporate debt which typically matures in 270 days or less.
Commercial paper is short-term, unsecured corporate debt which typically matures in 270 days or less.
Who are considered the owners of a corporation?
Common and preferred stockholders
List the securities that are considered equities.
Common and preferred stocks
For a Treasury auction, what's the difference between a competitive bid and non-competitive bid?
Competitive bids indicate both a quantity and price, while non-competitive bids only indicate a quantity.
What is often required before a revenue bond can be issued?
Conducting a feasibility study
Name some of the advantages of buying convertible bonds.
Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it's still a bond).
Calculate the price of a corporate bond quoted at 98 ¾.
Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50.
___________ preferred stock allows owners to exchange the preferred shares for common shares.
Convertible preferred stock allows owners to exchange the preferred shares for common shares.
Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in ______.
Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in 32nds.
Corporate bonds that are rated below investment grade are referred to as __________ or ____ bonds.
Corporate bonds that are rated below investment grade are referred to as high-yield or junk bonds.
Who issues debt?
Corporations, municipalities, the U.S. government and its agencies
List some examples of issuers.
Corporations, the U.S. Treasury, foreign governments, states and other municipalities
What is credit risk?
Credit (default) risk is the risk that a company will be unable to pay interest or principal on it's bonds.
Credit risk measures the issuer's risk of _________________________.
Credit risk measures the issuer's risk of default on debt service.
This voting method allows stockholders to multiply the number of shares owned by the number of directorships.
Cumulative voting
In a liquidation, place the following in priority: preferred shareholders, unsecured creditors, current wages
Current wages, unsecured creditors, then preferred shareholders
Customers become ___________________ if their cash or securities positions exceed SIPC coverage.
Customers become general creditors if their cash or securities positions exceed SIPC coverage.
___________ stock fluctuates with the business cycle.
Cyclical stock fluctuates with the business cycle (auto companies).
_________ stocks are associated with companies that are resistant to recession.
Defensive stocks are associated with companies that are resistant to recession.
List some short-term interest rates.
Discount rate, fed funds rate, prime rate, and the London Interbank Offered Rate (LIBOR)
What are Eurodollar bonds?
Dollar-denominated bonds issued outside the U.S.
Each payment from FHLMC will represent both ____________ and ____________.
Each payment from FHLMC will represent both principal and interest.
Each payment from GNMA will represent both ____________ and ____________.
Each payment from GNMA will represent both principal and interest.
What is an ECN?
Electronic Communication Network; any one of several systems which permit the entry and dissemination of quotes
Identify the acronym: ERISA
Employee Retirement Security Act
Equity holders are owners and are entitled to receive __________, which are derived from corporate ________.
Equity holders are owners and are entitled to receive dividends, which are derived from corporate profits.
If a bond matures on June 1, on what two dates will the bond pay interest?
Every June 1 and December 1 (when given the maturity date, the next payment is six months later)
If a bond matures on November 15, on what two dates will the bond pay interest?
Every November 15 and May 15 (when given the maturity date, the next payment is six months later)
List the two main types of secondary markets.
Exchange markets (e.g. the NYSE or Nasdaq) and electronic, nonexchange markets (e.g. the Pink Sheets or the OTCBB)
How is interest on Treasuries treated for tax purposes?
Exempt at the state and local level, but subject to federal tax
Existing stockholders receive ______ right for every one share owned.
Existing stockholders receive one right for every one share owned.
Name some Self-Regulatory Organizations (SROs).
FINRA, MSRB, CBOE, and other exchanges
True or False: SIPC is backed by the full faith and credit of the U.S. government.
False
True or False: SIPC provides coverage for both commodities and futures accounts.
False
True or False: A penny stock has a bid price of less than $1.00 per share?
False. A penny stock is an unlisted security whose bid price is less than $5.00 per share.
True or False: ADRs must be issued with cooperation from the foreign issuer.
False. ADRs that are issued without assistance from the foreign company are considered unsponsored.
True or False: The lock-up provision lasts for exactly six months.
False. Although most lock-ups last for six months, there is no regulation which sets a maximum or minimum period.
True or False: Both stocks and bonds represent ownership in a corporation.
False. Bonds are debt instruments, while stocks represent ownership interest in a corporation.
True or False: All municipal bonds are exempt from federal taxes.
False. Certain municipal bonds are not tax exempt.
True or False: All employees of a corporation are control persons.
False. Control people are officers, directors, and greater than 10% owners.
True or False: Convertible preferred stock may be converted into a bond.
False. Convertible securities are convertible into common stock.
True or False: Corporate and municipal bonds prices are quoted in 32nds.
False. Corporate and municipal bonds prices are quoted in 8ths, while Treasuries are quoted in 32nds.
True or False: Interest paid on corporate bonds is entirely tax-exempt.
False. Corporate bond interest is taxed at the federal, state, and local level.
True or False: Decisions arising from arbitration may be appealed to the federal court system.
False. Decisions are binding on both parties and may NOT be appealed.
True or False: Common stockholders have the right to vote for the payment of dividends.
False. Dividend payments are determined by the board of directors.
True or False: An individual with $100 million in assets is a QIB.
False. Even with $100 million in assets, individuals are not considered QIBs.
True or False: FNMA and FHLMC securities are backed by the full faith and credit of the U.S. Treasury.
False. GNMA securities are government guaranteed, but FNMA and FHLMC securities are not.
True or False: In bankruptcy, common shares are senior to preferred shares.
False. If a company declares bankruptcy, preferred shares are paid before common shares.
True or False: Callable preferred shares allow an investor to buy shares of common stock at a fixed price.
False. If preferred shares are callable, the issuer is allowed to buy back the shares at a fixed price.
True or False: An issuer must call all of its bonds at the same time.
False. Issuers may call only part of a bond issue back. This is called a partial call.
True or False: Issuers of unsponsored ADRs are subject to SEC reporting requirements.
False. Issuers of ADRs, foreign governments, and foreign private issuers are exempt from the reporting requirements.
True or False: Short-term bonds typically have higher coupon (interest) payments.
False. Long-term bonds typically pay more interest since investors assume greater default risk.
True or False: An issuer will perform a lottery for a full call.
False. Lotteries are only necessary for partial calls.
True or False: Purchasers of new municipal bonds must receive a prospectus.
False. Municipal bond investors receive an Official Statement (OS), not a prospectus.
True or False: All owners have the right to vote.
False. Only common stockholders have the right to vote.
True or False: Investors may exercise a bond's call privilege any time after issuance.
False. Only issuers may exercise the call privilege after the call protection period has passed.
True or False: Both common and preferred stockholders are offered preemptive rights.
False. Preemptive rights are only offered to common stockholders.
True or False: Rule violations are handled by the Code of Arbitration.
False. Rule violations are covered by the Code of Procedure.
True or False: SIPC provides coverage for market losses.
False. SIPC protects against BD bankruptcy.
True or False: The settlement date for T-Bills purchased at the auction is the next business day.
False. Settlement at auction is the Thursday following the auction. Next business day is for secondary market trading.
True or False: Long-term CDs are considered money-market instruments.
False. Since long-term CDs mature in over one year, they are not money-market instruments.
True or False: Junk bonds typically offer lower yields.
False. Since the issuer is more likely to default, junk bonds offer a higher rate of return.
True or False: Investors buy zero-coupon bonds for income.
False. Since zero-coupon bonds don't have semi-annual payments, they aren't suitable for income investors.
True or False: Individual investors typically place competitive bids at a Treasury auction.
False. Small investors typically place non-competitive bids, which do not indicate a price.
True or False: T-Bills are quoted on a dollar basis.
False. T-Bills are quoted on a discount yield basis.
True or False: The Investment Company Act of 1940 requires mutual fund managers to register.
False. The Investment Advisers Act of 1940 is the Act that requires money managers to register.
True or False: The offer (ask) is the price at which a broker-dealer is willing to buy shares from a customer.
False. The bid price is the price at which a firm will buy, while the offer (ask) is the price at which it will sell.
True or False: The credit rating of an IDR is based on the credit of the municipality.
False. The rating is based on the corporation making the lease payments.
True or False: Collateral Trust Bonds are backed by the stock of the issuing corporation.
False. The stock pledged must be that of a separate company.
True or False: The Code of Procedure can be used by a customer against a member firm to resolve a monetary dispute.
False. This situation would be handled under the Code of Arbitration.
True or False: If a BD holds a customer's stock in street name, the BD may vote on behalf of the customer.
False. Without permission, BDs holding a customer's stock in street name may not vote on behalf of the customer.
List the Government Sponsored Entities (GSEs) that issue securities which are not based exclusively on mortgages.
Federal Farm Credit Banks (FFCBs), Federal Home Loan Banks (FHLB) and Student Loan Marketing Association (SLMA)
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
Fixed-income investors receive _________, while stockholders receive __________.
Fixed-income investors receive interest, while stockholders receive dividends.
What are not considered equity securities?
Fixed-income products, such as bonds and notes
Give some examples of what SIPC does NOT cover.
Fraud, futures contracts, and commodities
What are the two types of arrangements that an introducing firm can have with a carrying firm?
Fully Disclosed and Omnibus
How is interest on corporate bonds treated for tax purposes?
Fully taxable (taxed at the federal, state, and local level)
______ is the mortgage-backed agency that is fully backed by the U.S. Government.
GNMA is the mortgage-backed agency that is fully backed by the U.S. Government.
How often do GNMA pass-throughs make payments?
GNMA pass-throughs make payments monthly.
General Obligation (GO) bonds are backed by the issuer's ________________________ and their ability to levy _______.
General Obligation (GO) bonds are backed by the issuer's full faith and credit and their ability to levy taxes.
______________________ bonds would most likely require voter approval.
General Obligation (GO) bonds would most likely require voter approval.
Identify the acronym: GO
General Obligation (bond)
What are the two main types of municipal bonds?
General obligation (GO) and revenue bonds
What type of municipal bond is subject to a debt ceiling (limit)?
General obligation (GO) bonds are subject to debt limits since they're paid using tax revenue.
List the government agencies that issue securities that are based on mortgages.
Government Nat. Mortgage Assoc. (GNMA), Federal Nat. Mortgage Assoc. (FNMA) and Federal Home Loan Mortgage Corp. (FHLMC)
______ stocks are issues of a companies with sales, earnings, and market shares that are expanding.
Growth stocks are issues of a companies with sales, earnings, and market shares that are expanding.
If a bond is referred to as trading flat, this means it trades ___________________________.
If a bond is referred to as trading flat, this means it trades without accrued interest.
If a bond's first coupon payment is less than six months after its issuance, it's referred to as a _____ coupon.
If a bond's first coupon payment is less than six months after its issuance, it's referred to as a short coupon.
If a bond's first coupon payment is more than six months after its issuance, it's referred to as a ____ coupon.
If a bond's first coupon payment is more than six months after its issuance, it's referred to as a long coupon.
In a ___________ sale, an issuer invites underwriters to compete against one another by submitting bids for the issue.
In a competitive sale, an issuer invites underwriters to compete against one another by submitting bids for the issue.
In a corporation, _________ stockholders have the most junior claim to assets.
In a corporation, common stockholders have the most junior claim to assets.
In a _____ _________ account, information about each customer of the introducing firm is sent to the clearing firm.
In a fully disclosed account, information about each customer of the introducing firm is sent to the clearing firm.
Ben's margin account has a market value of $800,000 and a debit balance of $350,000. How much SIPC coverage is provided?
In a margin account, SIPC covers the net equity (market value minus debit). In this example, $450,000.
In a __________ sale, an issuer selects the lead underwriter or senior manager that will sell the issue to the public.
In a negotiated sale, an issuer selects the lead underwriter or senior manager that will sell the issue to the public.
In a ____, a dealer sells bonds to another dealer and agrees to repurchase them at a specific time and price.
In a repo, a dealer sells bonds to another dealer and agrees to repurchase them at a specific time and price.
What is the benefit of buying convertible preferred stock?
In addition to receiving dividends, investors have the ability convert the shares into common stock of the company.
In an _______ arrangement, a clearing firm doesn't have information on each individual customer of an introducing firm.
In an omnibus arrangement, a clearing firm doesn't have information on each individual customer of an introducing firm.
What type of stock may be entitled to extra dividends?
In profitable years, participating preferred stockholders may be paid both prior to, and after, common stockholders.
_________ stock pays higher than average dividends.
Income stock pays higher than average dividends (utility companies).
By what types of taxes are state general obligation bonds backed?
Income, sales, or gasoline tax, but also licensing fees and fines.
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR) bond
Industry disputes are handled through ______________.
Industry disputes are handled through Arbitration.
Identify the acronym: IC Act of '40
Investment Company Act of 1940
Which department of a broker-dealer handles the underwriting and issuance of securities for clients?
Investment banking
List some responsibilities of a transfer agent.
Issue and cancel securities, pay dividends and interest, mail shareholder reports, handle lost or stolen certificates
Issued stock - Treasury stock = ____________________
Issued stock - Treasury stock = Outstanding stock
______ stock is the amount of stock a corporation has already sold to investors.
Issued stock is the amount of stock a corporation has already sold to investors.
Issuers of bonds may be referred to as __________.
Issuers of bonds may be referred to as debtors.
When an issuer or an affiliate is repurchasing its own shares, how many BDs may it use in one day?
Issuers or affiliates may use only one BD a day when repurchasing its own stock.
Issuers/affiliates repurchasing their own shares may not buy the shares in the last ____ minutes of the trading day.
Issuers/affiliates repurchasing their own shares may not buy the shares in the last 30 minutes of the trading day.
For a bond, what does a call feature allow?
It allows the issuer to buy (call) the bond back from the bondholders prior to maturity.
What is the advantage for a corporation that issues convertible bonds?
It is able to pay a lower rate of interest (i.e., lower coupon).
What does it mean to clear a trade?
It is the end-of-day process of matching trades executed by a BD to determine what is owed.
If an issuer is buying its own securities on an exchange, how many broker-dealers is it allowed to use?
It may only use one broker-dealer per trading session
How does the Dutch Auction set the interest rate on Auction Rate Securities?
It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).
What are joint accounts considered by SIPC?
Joint accounts are considered separate from individual accounts.
What are Auction Rate Securities (ARS)?
Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction
When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?
Lower, due to the added opportunity
MIG stands for ___________________________.
MIG stands for Moody's Investment Grade.
What is the role of an SRO?
Maintain fair and orderly securities markets and establish rules and regulations for protecting investors
_________ and ______ are the two types of bond redemptions.
Maturity and calls are the two types of bond redemptions.
Money-market securities have a maturity of __________________.
Money-market securities have a maturity of one year or less.
How often do pass-through certificates make payments?
Monthly
Moody's rates municipal notes using ______, ______, ______, ______.
Moody's rates municipal notes using MIG1, MIG2, MIG3, SG.
What is the maturity range of a T-Bond?
More than 10 years
List the types of secured corporate bonds.
Mortgage bonds, equipment trust certificates, collateral trust bonds and asset backed securities
Municipal bond interest is exempt from __________ tax.
Municipal bond interest is exempt from federal tax.
What is a Bond Anticipation Note (BAN)?
Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond
What is a Tax Anticipation Note (TAN)?
Municipal note issued in anticipation of future real estate taxes
What is a Grant Anticipation Note (GAN)?
Municipal note issued in anticipation of receiving government funding in the form of a grant
What is a Revenue Anticipation Note (RAN)?
Municipal note that will eventually be paid from future federal or state subsidies
What are some examples of tax-free money-market instruments?
Municipal notes and tax-exempt commercial paper
Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $__________.
Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $100,000.
What are the volume limitations on an affiliate or issuer repurchasing its own security?
No more than 25% of the average daily trading volume (ADTV) over a 4-week period in one day
May Eurodollar bonds be issued in the U.S.?
No, and they are not registered with the SEC.
Is the conversion of a bond a taxable event?
No, it is a tax-free exchange. The taxable event would occur when the stock is sold.
Is an income bond appropriate for a client who desires income?
No. Income (adjustment) bonds will only pay interest if the issuer has sufficient income.
Is SIPC part of the U.S. Government?
No. It is a non-profit entity funded by assessments on BD members.
Does SIPC insure client assets?
No. SIPC protects against firm bankruptcy.
Does SIPC protect customers from market losses?
No. SIPC protects customers from losses due to BD bankruptcy.
Does the MSRB have the authority to enforce its own rules?
No. The MSRB has no enforcement authority.
List the three bond yields.
Nominal, Current, and Yield-to-Maturity
Define penny stock.
Non-exchange traded securities that are priced at less than $5 per share
Identify the acronym: NASAA
North American Securities Administrators Association
Who can charge a client for buying or selling securities?
Only registered broker-dealers can levy transaction-based charges. Remember, investment advisers charge fees for advice.
Who can charge a client for securities-related advice?
Only registered investment advisers. Remember, BDs charge a commission for executing trades, not for advice.
What will SIPC cover in a customer's margin account?
Only the customer's equity (securities clear of any outstanding loan)
Name two priorities that preferred stock has over common stock.
Order of liquidation and dividends
Identify the acronym: OTC
Over-the-Counter
What is the longest duration for a warrant?
Perpetual
Where may quotes for non-Nasdaq (OTC equity) stocks be found?
Pink Sheets or the OTC Bulletin Board
In a liquidation, place the following in priority: warrants, preferred shareholders, common shareholders
Preferred shareholders, common shareholders, then warrants
What group of stockholders receives dividends first?
Preferred stockholders
What risk is primarily associated with mortgage-backed securities?
Prepayment risk
What is a specific risk that may be attributed to a GNMA fund?
Prepayment risk. This is the risk that mortgages may be paid off early.
In general, what are the two types of securities markets?
Primary and secondary
__________ of a broker-dealer are responsible for supervising registered employees.
Principals of a broker-dealer are responsible for supervising registered employees.
Local general obligation bonds are backed by what type of tax?
Property tax (e.g., school district bonds)
When analyzing GO bonds, what are some important considerations?
Property values, per capita income and debt, population, current debt, tax collection, unfunded pension liabilities
QIB stands for ___________________________.
QIB stands for Qualified Institutional Buyer (QIB).
If a bond's price has risen from 98 to 108, what has likely happened to interest rates?
Rates have probably fallen, which has caused the increase in the bond's price.
If a bond's price has fallen from 98 to 91, what has likely happened to interest rates?
Rates have probably risen, which has caused the decline in the bond's price.
Identify the acronym: RR
Registered Representative
Revenue bonds are backed by ___________________ generated by ________________________.
Revenue bonds are backed by specific revenue (user fees) generated by a project or facility.
What two sources are used to pay debt service on a double-barreled bond?
Revenue dollars and tax dollars
Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.
Rights are a short-term instrument allowing holders to buy additional shares at a discounted price.
What types of industry issues are handled under the Code of Procedure (COP)?
Rule violations
How does S&P and Moody's further differentiate their ratings?
S&P uses + or - , while Moody's uses 1, 2, 3.
Jim's cash account contains $275,000 of cash and $185,000 of securities. How much SIPC coverage is provided?
SIPC coverage is provided for $250,000 of cash and the full $185,000 of securities.
How is the FDIC different from SIPC?
SIPC does not insure bank deposits. Instead, it insures BD clients against the loss of securities due to BD bankruptcy.
SIPC provides coverage of $_________ of which no more than $_________ can be cash.
SIPC provides coverage of $500,000 of which no more than $250,000 can be cash.
In a liquidation, place the following in priority: secured creditors, common shareholders, debentures
Secured creditors, debentures (unsecured creditors), then common shareholders
Which Act created SIPC?
Securities Investor Protection Act of 1970 (SIPA)
Identify the acronym: SIPC
Securities Investor Protection Corporation
_____________________________ protects customers from BD bankruptcy.
Securities Investor Protection Corporation (SIPC) protects customers from BD bankruptcy.
What is SIPC?
Securities Investor Protection Corporation. SIPC protects separate customers in the event of BD bankruptcy.
Identify the acronym: SEC
Securities and Exchange Commission
Identify the acronym: SRO
Self-Regulatory Organization (such as FINRA)
Does SIPC protect separate customers or separate accounts?
Separate customers. A customer with both a cash and margin account with a BD would be covered once.
What is the maturity type where a portion of principal is retired each year?
Serial bond
Who is a lock-up agreement meant to protect?
Shareholders/investors
Standard & Poor's four ratings for municipal notes are ______, ______, ______, ______.
Standard & Poor's four ratings for municipal notes are SP-1+, SP-1, SP-2, SP-3.
What voting method permits one vote for each share owned to be voted for each director?
Statutory
Define control stock.
Stock that is owned by officers, directors, or greater than 10% owners. It is also referred to as affiliated stock).
Describe cumulative preferred stock.
Stock that requires payment of any missing dividends before common stockholders are paid
The following would be a quote for what security? Bid 4.26 Asked 4.22
T-Bill
T-Bills are issued in maturities of: ____ week, ____ week, ____ week, and ____ week
T-Bills are issued in maturities of: 4 week, 13 week, 26 week, and 52 week
Name some of the different types of money-market instruments.
T-Bills, Bankers' Acceptances (BAs), Commercial Paper, Negotiable CDs
List some examples of marketable Treasury securities.
T-bills, T-notes, T-bonds, T-STRIPS, TIPS and Cash Management Bills
Identify the acronym: TCPA
Telephone Consumer Protection Act (of 1991)
What is the SRO for exchange-traded options?
The Chicago Board Options Exchange (CBOE)
The______________________ covers disciplinary actions by FINRA against member firms and their employees.
The Code of Procedure covers disciplinary actions by FINRA against member firms and their employees.
What Act governs private, qualified retirement accounts?
The Employee Retirement Security Act of 1974
Identify the acronym: FDIC
The Federal Deposit Insurance Corporation
What organization is responsible for implementing monetary policy in the United States?
The Federal Reserve Board
What is the SRO for corporate securities?
The Financial Industry Regulatory Authority (FINRA)
The __________________________________________ is the SRO for the OTC market.
The Financial Industry Regulatory Authority (FINRA) is the SRO for the OTC market.
What is FINRA?
The Financial Industry Regulatory Authority; created by the merger of the NASD and NYSE regulatory authorities
The IC Act of '40 requires a fund with more than _____ shareholders to register with the SEC.
The IC Act of '40 requires a fund with more than 100 shareholders to register with the SEC.
What is the federal law that governs investment advisers?
The Investment Advisers Act of 1940
Who is responsible for the formulation and interpretation of rules for the municipal industry?
The MSRB
Which federal law created the NASD?
The Maloney Act of 1938
What is the SRO for municipal securities?
The Municipal Securities Rulemaking Board (MSRB)
The Maloney Act of 1938 is credited with creating which SRO?
The NASD. In 2007, the regulatory units of the NASD and NYSE merged to create FINRA.
Where can you find quotes for stocks not listed on an exchange or Nasdaq?
The OTCBB and Pink Sheets
Who guarantees and issues all exchange-listed option contracts?
The Options Clearing Corporation (OCC)
What is the OTCBB?
The Over-the-Counter Bulletin Board -- provides electronic quotes for non-Nasdaq (OTC equity) stocks
When an issuer performs a partial call, how does it choose which bonds to call?
The Reorganization Department must use an impartial lottery to select bonds.
Which department of a broker-dealer writes reports about markets and securities for investors?
The Research Department
Which federal law governs the registration of new issues?
The Securities Act of 1933
The Securities Act of 1933 regulates _____________.
The Securities Act of 1933 regulates new issues.
Which federal law created the SEC?
The Securities Exchange Act of 1934
Which federal law governs the registration of RRs and their firms?
The Securities Exchange Act of 1934
The Securities Exchange Act of 1934 regulates the __________ _______.
The Securities Exchange Act of 1934 regulates the Secondary Market.
Under which federal law are firms, RRs, and exchanges registered?
The Securities and Exchange Act of 1934
From what do Self Regulatory Organisations (SROs) derive their power?
The Securities and Exchange Commission (SEC)
What U.S. Government agency, created by the '34 Act, enforces securities laws?
The Securities and Exchange Commission (SEC)
What Act prevents terrorists from laundering money?
The USA PATRIOT Act
What is the advantage existing stockholders receive through rights offerings?
The ability to maintain their percentage of ownership and buy additional shares at a discount.
What is the price at which a dealer is willing to sell?
The ask or offer price
What is the price at which a dealer is willing to buy?
The bid price
The __________________ is responsible for overseeing a company and appointing its senior managers.
The board of directors is responsible for overseeing a company and appointing its senior managers.
The __________________ represents the amount above par that issuers pay to redeem bonds early.
The call premium represents the amount above par that issuers pay to redeem bonds early.
If Mary has a cash account as well as an IRA account, what coverage will SIPC provide?
The cash account is one customer and the IRA (which is a trust) is a second customer. So, $500,000 for each customer.
What does it mean for a client to use a prime brokerage account?
The client trades through multiple BDs, but has its trades cleared and settled with one prime BD
Describe the dated date.
The date on which a newly issued bond's interest begins to accrue
The formula for finding a bond's annual interest payment is: ___ x ______________________
The formula for finding a bond's annual interest payment is: Par x Coupon (Interest) Rate
The formula for finding a bond's semi-annual interest payment is: (___ x ______________________) ÷ __
The formula for finding a bond's semi-annual interest payment is: (Par x Coupon (Interest) Rate) ÷ 2
The formula for finding conversion ratio is: ______ ÷ ____________
The formula for finding conversion ratio is: Par ÷ Conversion Price (par for a bond is $1,000)
The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________
The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)
The ______ market refers to direct institution-to-institution trading and doesn't involve public exchanges.
The fourth market refers to direct institution-to-institution trading and doesn't involve public exchanges.
The interest rate charged on overnight loans on a bank-to-bank basis is referred to as the _________ rate.
The interest rate charged on overnight loans on a bank-to-bank basis is referred to as the fed funds rate.
What is a lock-up period?
The length of time a pre-IPO shareholder must wait before selling his shares
What price do non-competitive bidders agree to pay at a Treasury auction?
The lowest price (highest yield) of the accepted competitive bids
Explain the secondary market.
The market on which existing securities are traded
Explain the primary market.
The market on which new securities are offered
The maximum maturity of commercial paper is ____ days.
The maximum maturity of commercial paper is 270 days.
The minimum face value of a T-Bill, T-Note or T-Bond is $______.
The minimum face value of a T-Bill, T-Note or T-Bond is $100.
The most common security that's issued by government agencies is a mortgage-backed ____________ certificate.
The most common security that's issued by government agencies is a mortgage-backed pass-through certificate.
The new issue market is also known as the __________ market.
The new issue market is also known as the primary market.
Describe call protection.
The number of years after issuance during which bonds may not be called by the issuer
Which market is the decentralized, negotiated market?
The over-the-counter market (OTC)
The principal value of TIPS may be adjusted based on changes to the __________________________.
The principal value of TIPS may be adjusted based on changes to the Consumer Price Index (CPI).
The third market is the term used to describe ____ and ____ listed securities trading ________________.
The third market is the term used to describe NYSE and AMEX listed securities trading over-the-counter.
The ______________ is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.
The third market is where trades of NYSE or AMEX exchange-listed securities occur in the over-the-counter market.
Define debt service.
The total of all interest and principal payments for a bond offering
The type of bond that's backed by credit card receivables or home equity loans is considered an _____________________.
The type of bond that's backed by credit card receivables or home equity loans is considered an asset-backed security.
The type of bond where bondholders have a lien on real property is called a __________________.
The type of bond where bondholders have a lien on real property is called a mortgage bond.
For SIPC purposes, what happens to securities that are able to be specifically identified as belonging to a client?
They are distributed to the client without regard to the dollar amount limit.
If a BD goes bankrupt, what happens to securities registered in the customer's name?
They are returned to the customer without regard to SIPC limitations.
What time limit exists for issuers/affiliates of actively-traded securities that are repurchasing their own security?
They may not purchase their security within the last 10 minutes of the trading day
Explain the concept of holding securities in street name.
This is when client securities are held by and registered in the name of the BD
Though subject to federal tax, interest on Treasuries is exempt from ________ and ________ tax.
Though subject to federal tax, interest on Treasuries is exempt from state and local tax.
How is SIPC funded?
Through assessments on BDs that are SIPC members
Tim has both a cash and margin account with the same BD. If BD bankruptcy occurs, how are Tim's accounts handled?
Tim's accounts are combined for SIPC coverage purposes.
What is FINRA's primary objective?
To adopt, administer, and enforce rules in the securities industry.
What is NASAA's primary responsibility?
To establish and modify the Uniform Securities Act (USA), which is the basis for most states' securities laws.
Why are CMBs issued?
To finance the U.S. government on a very short-term basis (often day-to-day).
What is the purpose of the Federal Deposit Insurance Corporation?
To guarantee the safety of cash deposited in FDIC member banks against bank failure
What is the purpose of the FDIC?
To insure bank deposits and also to examine and supervise financial institutions for safety and soundness
What is the purpose of a lock-up provision?
To prevent large shareholders from selling immediately after an IPO, since it could cause the share price to fall.
What is the role of a broker-dealer's operations department?
To process paperwork, handle funds and securities transfers, and settle and confirm transactions
Tom has an individual account and a joint account with the same BD. How much SIPC coverage is provided?
Tom will have $1 million of coverage, since each account is covered separately.
Which department of a broker-dealer executes securities transactions?
Trading
Trading on material, non-public information is considered __________________.
Trading on material, non-public information is considered insider trading.
What are TIPS?
Treasury Inflation-Protected Securities
____________ stock is stock that was issued and repurchased by the issuing corporation.
Treasury stock is stock that was issued and repurchased by the issuing corporation.
True or False: A T-bill is a form of zero-coupon bond.
True
True or False: A hedge fund is an example of a client that may benefit from a prime-brokerage arrangement.
True
True or False: A stockholder is able to vote for a director, but not an officer.
True
True or False: Agency securities are typically AAA rated.
True
True or False: An increase in unfunded pension liabilities is a negative sign of the municipality's creditworthiness.
True
True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.
True
True or False: Common shares vote to authorize the issuance of additional shares of a company.
True
True or False: If revenue falls short, payments on moral obligation bonds only begin with legislative approval.
True
True or False: Interest-rate risk is the risk that changing interest rates will negatively impact the price of a bond.
True
True or False: Marketable Treasury securities can be bought and sold between investors.
True
True or False: Nasdaq is a securities exchange registered with the SEC.
True
True or False: The FDIC is backed by the full faith and credit of the U.S. government.
True
True or False: The Investment Company Act of 1940 requires mutual funds to register.
True
True or False: The MSRB has no authority or control over municipal issuers.
True
True or False: The interest rate on TIPS is fixed, but the principal may be adjusted.
True
True or False: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.
True
True or False: Treasury stock has no voting rights and receives no dividends.
True
True or False: Warrants are generally attached to the delivery of another security (stock or bond).
True
True or False: A market maker publishing a firm quote is obligated to honor the price and the number of shares quoted?
True. A BD providing a firm quote is obligated to honor both the price and size displayed.
True or False: Jim's joint account with his wife is considered a separate customer by SIPC.
True. E.g. Jim's cash and margin account are combined for coverage, but Jim's joint account with his spouse is separate.
True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.
True. However, it does not guarantee them representation on the board.
True or False: When deflation occurs (a decline in CPI), the principal value of TIPS will decrease.
True. However, the principal value will not decrease below par.
True or False: Customers of a broker-dealer can request to see the firm's balance sheet.
True. If requested, customers must be provided with the broker-dealer's most recent balance sheet.
True or False: Corporate shareholders have limited liability.
True. Shareholders can only lose their original investment if a company declares bankruptcy.
True or False: Asset-backed securities typically offer higher yields.
True. Since the assets backing these bonds are riskier, they offer a higher rate of return.
True or False: MSRB rules regulate the municipal activities of BDs, banks, and the employees of these institutions.
True. The MSRB also regulates municipal advertising.
True or False: Interest paid on GNMA, FNMA, FHLMC, and SLMA agency bonds is fully taxable to investors.
True. The interest is taxed at the federal, state, and local level.
True or False: Agency-backed CMOs have high credit ratings.
True. They are usually highly rated because of the collateral backing them.
True or False: A FINRA member firm must disclose whether it has the ability to influence the issuer of securities.
True. This is referred to as a control relationship which must be disclosed to investors.
True or False: With approval of the board, preferred dividends can be skipped in some years.
True. Unlike bond interest, preferred dividends are not required to paid each year.
True or False: Unlike equities, bonds do not have organized exchanges.
True. Unlike equity securities, corporate, municipal, and U.S. government bonds don't have organized exchanges.
Calculate the price of a Treasury bond that is quoted at 98 16/32.
Turn the fraction to a decimal: 16 ÷ 32 = .50, add it to the percentage of par, then multiply $1,000 by 98.50% = $985.
What types of debt instruments have the least amount of credit risk?
U.S. Treasuries
Under Rule 144, restricted stock must be held for ___ months before it can be sold.
Under Rule 144, restricted stock must be held for six months before it can be sold.
What is the proper order of liquidation for a corporation at bankruptcy?
Unpaid workers, IRS, secured creditors, unsecured creditors, preferred, and then common.
What is restricted stock?
Unregistered stock that is typically bought through a private placement before shares are offered publicly
Are debentures considered secured or unsecured?
Unsecured. They are backed only by the issuer's full faith and credit.
How are voting issues determined, by shares or shareholders?
Voting issues are determined based on a majority of shares.
List some of the rights that shareholders receive.
Voting, inspecting books and records, receiving dividends, evidence of ownership, and transferability
Regarding rights, options, and warrants, which instrument has the longest maturity?
Warrants
______ and _________ are generally bundled as single investment securities.
Warrants and bonds are generally bundled as single investment securities.
Warrants are a ______-term right to buy stock at a preset price.
Warrants are a long-term right to buy stock at a preset price.
When interest rates go down, bond prices go __.
When interest rates go down, bond prices go up.
When interest rates go up, bond prices go ____.
When interest rates go up, bond prices go down.
Identify the acronym: WSP
Written Supervisory Procedures
What is the name that's given to a broker-dealer's internal policies and procedures?
Written Supervisory Procedures (WSP)
What bonds are dollar-denominated, U.S. registered, and issued by multinational companies and foreign governments?
Yankee Bonds
May Eurodollar bonds later trade in the U.S.?
Yes
May a warrant be detached and traded separately?
Yes
Will a bond's conversion price and conversion ratio be adjusted for stock splits or stock dividends?
Yes, due to a bond's non-dilutive feature.
Are ADR holders exposed to currency risk?
Yes, since these securities will track the underlying stock.
Is default possible on a municipal offering?
Yes. Only U.S. Government issues are considered free of default risk.
If attached to the issuance of a bond, may warrants be traded separately?
Yes. The two may be detached and traded separately.
Zero coupon bonds are purchased at a __________ and mature at ____________.
Zero coupon bonds are purchased at a discount and mature at par value.
If a company's existing shareholders sell 2 million shares, by what amount will its shares outstanding increase?
Zero. If a company's existing shareholders are offering their shares, no new shares are being issued.