SIE - Pt. 2
A customer sells 2 ABC Jan 45 Puts @ $5 when the market price of ABC is $44. ABC stock falls to $32 and the customer is assigned. The customer then sells the stock in the market. The loss is:
$1,600 At $32, the puts are "in the money" and would be exercised forcing the customer to pay the strike price of $45 for shares that are subsequently sold for $32. The loss of 13 points is partially offset by the premiums received of $5 per share for a net loss of 8 points x 200 shares = $1,600.
A customer has $8,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has a(n):
$3,000 capital loss deduction and a $2,000 loss carryforward The tax law allows capital gains and losses to be netted each year. Net capital gains are fully taxable at the appropriate tax bracket. However, only $3,000 of net capital losses can be deducted in any year. Any losses above this amount can be carried forward to the next tax year. Here, the customer has a net capital loss of $5,000 of which $3,000 can be deducted this year with the unused $2,000 loss carried forward to the next tax year.
On the same day in a margin account, a customer sells short 100 shares of ABC at $43 and buys 1 ABC Jan 45 Call @ $4. The customer will break even at:
$39 per share The customer has sold short the stock at $43, hoping to profit if the price should fall. As a hedge, the customer bought the call option to buy in the stock at a price of $45 if the market should rise. This protects the short stock position from unlimited upside loss potential. Since the customer sold the stock at $43 and paid $4 for the call option, the customer has a net sale amount of $39. To break even, the customer must buy back the stock at $39 per share.
A DEF Jan 50 Put is trading at a premium of $6 when the market price of DEF stock is $48. The extrinsic value per share is:
$4 The option premium has 2 components - "time premium" and "intrinsic value." Time premium is also called "extrinsic value," while intrinsic value is also called the "in the money" amount. Extrinsic value or time premium is any amount above the "in the money" amount. This contract is in the money by 2 points (the holder has the right to sell the stock at $50 when the market price is $48, for a $2 intrinsic profit in the contract. Since the market premium is $6, the time premium, or extrinsic value is $4. The amount of the time premium (extrinsic value) is mainly dependent on the time to expiration (longer expiration = higher time premium) and volatility of the underlying stock (more volatile = higher time premium).
A customer sells 2 ABC Jan 45 Puts @ $5 when the market price of ABC is $44. The breakeven point is:
$40 The writer collected $5 in premiums by obligating him- or herself to buy the stock at $45. If exercised, the customer's net outlay is $40 for the stock. To breakeven, the customer must be able to sell the position for $40.
In January, 20XX a customer buys 100 shares of ABC stock at $50 per share and pays a $2 commission per share. The customer receives $2 in cash dividends during the year. The customer's cost basis in the stock is:
$52 per share When the stock is purchased, any commission paid is not deductible - it is part of the cost basis of the shares. Thus, the cost basis for tax purposes is $50 + $2 commission = $52 per share. The $2 dividend received is included in taxable income for this year, and is not part of the stock's cost basis.
A customer buys 100 shares of ABC stock at $39 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer's maximum potential gain until the option expires is:
$800 If the market rises above $45 the short call will be exercised. The customer must deliver the stock that he bought at $39 for the $45 strike price, resulting in a $600 gain. Since $200 was collected in premiums as well, the total gain is $800. This is the maximum potential gain while both positions are in place.
ABC Company has outstanding 10% noncumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 7% preferred stock dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive:
10% Since this is noncumulative preferred stock, the corporation will only have to pay 10% - or this year's dividend, before paying a common dividend. Please note that virtually every preferred issue is cumulative - noncumulative issues are basically unmarketable. However, noncumulative preferred stock must be known for the exam!
Accrued interest on corporate bonds is computed:
30/360 up to, but not including, settlement date
Which of the following can be purchased on margin?
Closed End Funds trading on the NYSE New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the original offering of a closed-end fund or a unit trust. Both are made with a prospectus. However, once closed-end fund shares are listed on an exchange and begin trading in the market, they are marginable like any other listed stock.
Which of the following corporate obligations is secured?
Collateral trust certificate A secured bondholder has a lien on a specific asset of the company - such as securities given as collateral in the form of a collateral trust certificate. A debenture and subordinated debenture (a second layer of debentures issued after the first debenture offering of a company, where the second layer of debentures will be paid after the first layer - thus, they are "subordinate" to the first layer of debentures) are promises to pay without any liens on corporate assets. Commercial paper is a short term IOU and is only backed by the issuer's promise to pay.
Which of the following money market instruments is rated on a "P" scale?
Commercial Paper Commercial paper is rated by Moody's on a P-1,2,3, and NP ("Not Prime") scale. Municipal short-term notes are rated by Moody's on an MIG-1,2,3, and SG ("Speculative Grade") scale. Treasury bills and Fed Funds are not rated because they have an implied AAA rating - the safest of instruments.
Which of the following is NOT required to sell "144" stock?
Correct Answer A Buyer's representation letter B Issuer's representation letter C Broker's representation letter D Seller's representation letter
All of the following statements are true regarding the conduct of the weekly treasury auctions EXCEPT:
Correct Answer A Competitive bids will always be filled B Non-competitive bids take priority over competitive bids C 3 month T-Bills are auctioned weekly D 6 month T-Bills are auctioned weekly
The provisions of the Securities Exchange Act of 1934 cover all of the following activities EXCEPT:
Correct Answer A Trading rules for exempt securities B Trading rules for non-exempt securities C Anti-fraud provisions for exempt securities D Anti-fraud provisions for non-exempt securities
Which of the following indexes is the narrowest measure of the market?
Dow Jones Industrial Average The Dow Jones Industrial Average has 30 stocks, while the Dow Jones Averages contain 65 stocks - 30 industrials; 20 transportations; and 15 utilities. The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public." The Value Line Index includes 1,700 issues.
Enforcement of regulations regarding trading of listed securities in the "Third Market" is performed by:
FINRA "Third Market" trades are transactions in listed securities effected "over-the-counter." These trades do not take place on the floor of the exchange, hence NYSE does not have jurisdiction. It is FINRA that regulates broker-dealer activities that take place OTC and on stock exchanges.
Which of the following is a TRUE statement regarding Fannie Mae?
Fannie Mae has issued negotiable debt and equity securities
Which statements are TRUE about marking securities positions to market?
Long securities positions are marked to market daily
A customer wants to place an order to buy stock immediately. What order should be placed?
Market Market orders are first in line to be filled at the current market price.
Which of the following individuals cannot legally grant a power of attorney over his or her account to a third party?
33-year old who has been diagnosed with a psychotic disorder and is adjudicated incompetent In order to give a power of attorney, the grantor must be legally competent. Thus, the grantor cannot be a minor, since minors have no legal capacity. Additionally, the grantor cannot have been legally adjudicated as incompetent in a court of law - typically due to mental incapacitation - in which case a guardian or conservator is appointed to manage that person's affairs. An individual would consider granting a power of attorney (durable) if he or she was going overseas to a dangerous place for an extended period of time, and also if that individual was in a situation that was life threatening, such as undergoing serious surgery. Regarding the recently remarried husband, he can give a power of attorney to whomever he wants (regardless of his son's objections). The only requirement is the person who is granted the power of attorney be legally competent.
XYZ Corporation Income Statement Net Sales $10,000,000 Cost of Goods Sold 5,000,000 Gross Margin 5,000,000 Operating Expenses 2,000,000 Operating Income 3,000,000 Bond Interest 1,000,000 Net Income Before Tax 2,000,000 Tax at 50% 1,000,000 Net Income After Tax $1,000,000 What is XYZ's Bond Interest Coverage Ratio?
3:1
Ford Motor Company has issued 8% convertible debentures, convertible at a 25:1 ratio. Currently the debenture is trading at 110. The stock is trading at 38. What is the conversion price of the stock?
40 The bond is convertible into common at a 25:1 ratio, based on the par value of the bond. The conversion price formula is: $1,000/25 = $40
The Regulation T initial margin requirement for short stock positions is:
50% Regulation T initial margin for short stock positions is set at 50%.
Regulation T sets the initial margin to purchase a marginable stock position at:
50% of the purchase amount
The penalty for making an excess contribution to an Individual Retirement Account is:
6% of the excess contribution Excess contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not confuse this penalty with that imposed on a premature distributions from an IRA. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax.
All of the following are participants that trade municipal bonds in the secondary market EXCEPT:
A Bank dealers B General securities dealers Correct answer C Issuers D Municipal broker's brokers
All of the following are needed to open a cash account for a customer EXCEPT:
A Customer tax I.D. number B Name of employer Correct answer C Signature of customer D Customer address
Retirement plans that must comply with ERISA requirements include all of the following EXCEPT:
A Defined benefit plans B Profit sharing plans Correct answer C Federal Government plans D Payroll deduction savings plans
All of the following are exempt issues under Federal Securities Acts EXCEPT:
A Government Bonds B Small Business Investment Companies C State Chartered Bank Issues Correct answer D Municipal Bond Funds Government bonds, municipal bonds, state chartered bank issues (regulated by state banking laws) and small business investment companies (regulated by other federal legislation that created the SBA - Small Business Administration) are all exempt issues under the '33 Act. Note that when any of these securities are placed inside of an investment company, the investment company is a non-exempt issue that must be registered and sold with a prospectus.
Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would inquire about all of the following EXCEPT:
A Investment objective B Financial situation and needs C Tax status Correct answer D Educational background "Suitability" means that securities which are recommended to a customer are appropriate for that customer. To ascertain which investments are suitable for the customer, FINRA states that the basis for making the recommendation are the facts disclosed by the customer about his other security holdings and financial situation and needs. Inquiry should be made as the customer's investment objective, tax status, and financial status.
All of the following statements about investment company securities are correct EXCEPT:
A Open end fundshares are redeemable B Closed end fundshares are negotiable C Fixed unit investment trustsare redeemable Correct answer D Participating unit investment trustsare negotiable
A member or associated person is allowed to select all of the following relating to a customer transaction without requiring a written trading authorization EXCEPT:
A Price of the security to be purchased Correct answer B The security to be purchased C The trading venue in which the security will be purchased D The time of trade execution
What is NOT a risk of investing in a GNMA?
A Receiving principal payments earlier than expected in a declining interest rate environment B Reinvestment of payments received in a declining interest rate environment C Receiving principal payments later than expected in a rising interest rate environment Correct answer D Fluctuating principal value due to interest rate movements
Which of the following is NOT standardized for listed option contracts?
A Strike price B Contract size Correct answer C Premium D Expiration date
All of the following statements are true about a tender offer for common shares EXCEPT:
A The offer must remain open for at least 20 business days B Each "sweetening" of the offer must extend the offer for an additional 10 business days Correct answer C During the life of the offer, the issuer can buy the stock in the market in addition to buying shares via the offer D During the life of the offer, any subscribing investors' shares that are tendered are held in escrow pending the outcome of the offer
When selecting syndicate members for a new corporate bond offering, the managing underwriter will consider all of the following attributes when choosing a potential member EXCEPT:
A financial capability to handle its portion of the offering B track record in past underwritings Correct answer C back-office capability D geographic location
The individuals who make a secondary market in corporate bonds include all of the following EXCEPT:
A market makers B dealers C traders Correct answer D registered representatives
Stockholder approval is needed if a corporation wishes to do all of the following EXCEPT:
A split its stock 1 for 2 B split its stock 2 for 1 Correct answer C repurchase shares for Treasury D issue convertible securities
All of the following actions require a filing with the SEC EXCEPT:
A the purchase of a 5% position in one company's stock B an officer selling 1% of that company's stock C a broker-dealer's net capital computation Correct answer D a company declaring a cash dividend to stockholders
If a customer has a gain on a short stock position that he or she wishes to protect, which statement is TRUE?
A buy stop order will be entered The customer will "lose" the gain on a short stock position if the market begins to rise. To close the position, the customer has to buy. To buy in the position in a rising market, the order must be a buy stop order, which is placed above the current market. A buy limit order cannot be used because it is placed below the current market price.
In 2020, a self-employed individual earns $180,000 for the year, and contributes the maximum amount to an HR10 plan. If this individual wished to make a contribution to a self-directed Individual Retirement Account for this year, which statement is TRUE?
A maximum contribution of $6,000 is permitted, but no adjustment is allowed to that year's taxable income for that amount
Which of the following investment company terms are synonymous?
Bid; Net Asset Value Bid and Net Asset Value are the same terms for investment company shares. Bid is also the same thing as Redemption Price. Ask is the same thing as Public Offering Price.
An agent who lives and is registered in New York wishes to sell a municipal bond to a customer who lives in New Jersey. Which statement is TRUE about the registering of this agent and his or her broker-dealer in New Jersey?
Both the agent and the broker-dealer must be registered in New Jersey Municipal bonds are an exempt security, from both Federal and State registration. However, broker-dealers and their sales employees that sell these bonds must still be registered in each state where the securities are being offered (since they can offer these securities fraudulently, and the state wants to know where to find these persons if they do so!).
Which statement is TRUE regarding a corporation that has adopted cumulative voting?
Minority stockholders have a greater ability to elect the director of their choice Under "cumulative" voting, shareholders can accumulate their votes and place them on any directorship (or combination of directorships). Thus, minority shareholders who place all of their accumulated votes on 1 director have a reasonable chance of electing that person. The statement that each shareholder must accumulate his votes and cast them for 1 director is false - the votes are accumulated and can be cast as the stockholder sees fit. The statement that each director must be elected by a majority of the shareholders is incorrect - each director must be elected by a majority of the outstanding shares. The statement that minority shareholders are given proportionately more votes than majority shareholders is incorrect - the benefit of cumulative voting is that the minority shareholder can vote all of his votes for 1 (or for a few) director(s), and by virtue of the extra weight of those votes, get the director(s) elected.
Trades of NASDAQ listed securities that take place in all markets are consolidated and reported through the:
Network C Tape Reports of trades of NASDAQ issues are made through the Network C Tape, regardless of the market venue where the trade took place. The Network A Tape reports trades of NYSE-listed issues, regardless of the market venue where the trade took place. The Network B Tape reports trades of NYSE American (AMEX) and regional exchange-listed issues, regardless of the market venue where the trade took place. There is no Network D Tape.
Who creates the list of SDNs that must be checked when opening an account for a foreigner or foreign entity?
OFAC The Department of Treasury's Office of Foreign Assets Control (OFAC) maintains a list of named countries, organizations, and individuals with whom anyone in the U.S. is prohibited from doing business. The "SDN" (Specially Designated Nationals) list includes such countries as Iran and North Korea and such organizations as the Al-Qaeda, as well as specified individuals associated with these countries and organizations. The intent is to place economic pressure on these groups by stopping U.S. investment in them. The SDN list must be checked before opening an account for a foreigner or foreign entity.
The provisions of the Penny Stock Rule, which require the pre-qualifying of a new customer before a "penny" stock can be sold to that individual, only apply to the recommendations of:
OTCBB securities The "penny stock rule" (Rules 15g-1 through 15g-6) requires that new customers who receive a recommendation and purchase non-exchange listed securities (meaning OTCBB or Pink OTC Markets issues) priced under $5 per share sign and return a suitability statement before sale can be confirmed. This rule is intended to stop "boiler room" high pressure phone sales of speculative penny stocks.
The interest rate charged from commercial banks to their best customers is the:
Prime Rate The lowest rate is the Federal Funds Rate. This is the rate on overnight loans of reserves from bank to bank. The next highest rate is the Discount Rate. This is the rate that the Federal Reserve charges member banks for borrowing reserves from the Fed, and is typically set at 50 basis points above the Fed Funds rate. The next highest rate is the Broker Loan Rate. This is the rate that brokerage firms can borrow from banks using securities as collateral. The highest rate is the Prime Rate. This is the rate for unsecured borrowing from banks by the best corporate customers.
A registered representative wishes to give a speech to a group of 35 potential retail clients at a restaurant. The speech is scripted and is a general discussion about investing in securities. Which statement is TRUE?
Prior principal approval must be obtained and a copy of the speech must be retained in your firm's Office of Supervisory Jurisdiction
Which statement describes trading of Rule 144A issues?
Rule 144A issues trade in the PORTAL market from QIB to QIB Rule 144A issues are private placement securities sold in minimum $500,000 blocks only to QIBs - Qualified Institutional Buyers (institutions with at least $100MM of assets available for investment). Whereas normal private placements cannot be traded, these can be traded from QIB to QIB. The market for this is PORTAL, but trading activity is thin in this market, especially as compared to the market for publicly traded securities.
Which statement is TRUE about the requirements for a stock to be quoted on the OTCBB?
The company must be registered with the SEC and must be current in its SEC filings Unlike exchanges which have listing standards, the Over the Counter Bulletin Board (OTCBB) is simply a quotation service for companies that do not meet exchange listing standards. To be quoted on the OTCBB, the company must be registered with the SEC and it must be current in its SEC filings. The NASDAQ Capital Market is an exchange with listing standards - these are the smallest companies that can meet NASDAQ listing requirements. Finally, there is no minimum market capitalization nor is there a minimum time period since incorporation for a company to be quoted on the OTCBB.
A registered representative receives an unsolicited order from a client to buy a mutual fund position that the client had not taken before. Which statement is TRUE about delivery of the fund prospectus?
The fund prospectus must be delivered no later than the confirmation of the purchase
Which statement is TRUE about a Life Annuity?
The periodic payment for a Life Annuity will be higher than the periodic payment for a Period Certain annuity A life annuity ceases when that person dies, so this is not a good choice for someone seeking to leave assets to heirs. A life annuity - period certain continues to make payments to a beneficiary if the person dies prior to the end of the "certain period." For example, if a life annuity -10 year period certain is purchased, and the purchaser dies after the 3rd year, the annuity continues to pay to a beneficiary for another 7 years. Because of the minimum guaranteed payment period, the periodic payment amount is lower than a simple life annuity (since the insurance company must pay for a longer guaranteed time period).
The primary function of the custodian bank is to:
The primary function of the custodian bank is to safekeep the assets of the fund. The custodian bank can also perform the clerical functions of transfer agent and paying agent. The custodian bank does not manage the fund - this is performed by the investment adviser to the fund. The custodian bank does not set the investment objective of the fund - this is initially set by the sponsor. The financial statements of the fund are prepared by the outside accountants.
A registered representative at a member firm only deals in stocks and other equity investments. The registered representative helps an associate at that firm negotiate an underwriting of municipal bonds with a municipal issuer official that he knows very well from other business dealings. He does this as a 1-time event and is paid a finder's fee for his help. Which statement is TRUE?
The registered representative is considered to be a Municipal Finance Professional and is subject to the political contribution rule An "MFP" - a Municipal Finance Professional - is an associated person who solicits business from municipal issuers, renders financial advisory services to municipal issuers, or who performs research or writes reports on municipal issues. Because the representative was paid a finder's fee for helping get the municipal underwriting business from the issuer, that registered representative is defined as an MFP and comes under the $250 political contribution limit.
A customer asks her representative for a quote on XYZ stock, which the representative informs the customer is currently $31.00 Bid - $32.10 Ask. The customer tells the representative to buy 1,000 shares at $32.10. The representative places a marketable limit order to buy. When the trade is confirmed with the representative, it shows execution at $33.10. The representative contacts the firm's operations department about this, and after making an inquiry to the exchange, the operations department determines that the exchange quotation of $32.10 was erroneous. Which statement is TRUE?
The transaction can be canceled at the discretion of the customer This story is basically an execution error. In this case, the execution error occurred not because the firm botched the trade, but because the exchange published an erroneous quote. The customer can either accept or cancel the trade, since there was no error on the customer's part. If the firm incurs any loss because the customer cancels the trade, the firm will be able to make a claim against the exchange, because it was the exchange that screwed things up.
A promising new customer at a FINRA member firm has complained verbally to a registered representative that he lost $500 on the first stock recommended by that representative. Wanting to keep the customer, the representative offers to make this up to the customer by giving the customer, the customer's spouse, and each of the customer's 3 children a gift of $100. Which statement is TRUE?
This action is a violation of FINRA rules Guaranteeing a customer against loss is a prohibited practice. This representative is trying to get around the rule by breaking up the payments to cover the customer's $500 loss into $100 units. This is a clear rule violation.
A customer trades stock regular way on Monday, July 2nd. Settlement will occur on:
Thursday, July 5th Regular way settlement for stock trades is 2 business days after trade date. Because this stock was traded on Monday, July 2nd, settlement should be on Wednesday, July 4th - but this is a legal holiday and the markets are closed. Therefore, settlement will be on Thursday, July 5th - the 2nd business day after trade date.
What is defined as an investment company?
UIT A UIT is a Unit Investment Trust. This is a type of investment company defined under the 1940 Act. The Investment Company Act of 1940 also defines management companies and face amount certificate companies as investment companies. A private equity fund is a limited partnership private placement investment. A REIT is a Real Estate Investment Trust - it is not an investment company because it is not investing in securities. A DPP is a Direct Participation Program - these are tax-sheltered limited partnership investments.
Which statement is TRUE regarding the effect of market interest rate movements on callable and puttable bond prices?
When interest rates fall, the call price tends to set a ceiling on the market price of the bond and when interest rates rise, the put price tends to set a floor on the market price of the bond
The advantage of a limited partnership business structure as opposed to a corporate business structure is that limited partnerships:
allow for "flow through" of gain and loss, while corporations do not
Under FINRA rules, if a member suspects that a senior citizen is being financially exploited:
any hold placed on the account, if supported by the member's review of the situation, can be extended for another 10 business days FINRA permits member firms to place a temporary hold on disbursements from customer accounts if the firm suspects that the account owner is being financially exploited. The initial hold can be for up to 15 business days. In addition, if the member's review of the situation supports this, the member can extend the hold for another 10 business days.
For any claims that a customer may have against a failed broker-dealer that are in excess of Securities Investor Protection Corporation coverage limits, the customer:
becomes an unsecured general creditor with last claim in the liquidation Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit. For any uncovered claim amounts above these limits, the customer becomes a general creditor of the failed broker-dealer.
All new corporate bonds are issued in:
book entry form All new issues of U.S. Government bonds, municipal bonds and corporate bonds are book entry. A "book entry" bond is a fully registered bond where no paper certificate is issued. Instead, the owner simply receives that confirmation that he or she bought the bond. On such bonds, the paying agent mails the semi-annual interest payments to the registered owner. Note, however, that there are still many issues of long term corporate bonds still outstanding that have paper certificates. These bonds have not yet matured. Book entry bonds did not really come to dominate bond issuance until the 1990s, so 30-year bond certificates issued, say in 1995, do not mature until 2025. A fully registered bond is one issued with a physical certificate. The paying agent has the record of the owner's name and mails the interest payments semi-annually to the registered owner. Also note that no bearer bonds or registered to principal only bonds (a bond with bearer coupons, but the principal repayment is registered in the owner's name) have been sold since 1983. However, 40-year bearer coupon bonds still exist (at least until 2023!). Bearer bondholders receive interest payments by clipping coupons and submitting them to the paying agent.
A customer has a broadly diversified stock portfolio with a current market value of $2,500,000. The customer wishes to hedge the portfolio against a market decline. The customer should:
buy 10 SPX 2500 Puts Index options can be used to "efficiently" hedge a broadly diversified stock portfolio because each contract has a large "notional" value. Each SPX 2500 contract covers 2500 (index value x 100 (multiplier) = $250,000 of portfolio value. To hedge a $2,500,000 portfolio, 10 put contracts are needed. This is much easier than attempting to buy individual put contracts on the stock positions held in the portfolio. If the market drops, the gain on the index puts offsets the loss on the physical stock portfolio. The short sale of stock positions in the portfolio results in a "net 0" position, so there could be no further possible gain if the market rises (and no further loss if it falls). Selling the securities in the portfolio "long" would liquidate those positions - again, that is not a hedge.
Fully paid customer securities:
can be held by the member firm if they are segregated, and placed in safekeeping Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping. Customer margin securities are pledged as collateral for the margin loan. The broker is permitted to commingle ("mix-up") these securities with those of other margin customers (but not with fully paid customer securities), and it is these margin securities that may be pledged to a bank for a loan.
A "blue chip" corporation experiencing a short term cash flow shortage could issue:
commercial paper The short term money market instrument issued by corporations is commercial paper.
An increasing Consumer Confidence Index indicates that:
consumers are confident in the overall economy and future spending is likely to increase
A customer wishes to purchase $100,000 face amount of municipal bonds that the broker-dealer does not have in inventory. Under MSRB rules, the firm should:
contact enough dealers so that a reasonable market quote is obtained Under MSRB rules, when a municipal dealer acts in an agency capacity, the price charged must be representative of the market for that type of security. There is no requirement to obtain a pre-set number of quotes, nor is there a requirement to direct the customer to a dealer that physically has those bonds. The dealer would not sell short the bonds to the customer, since short covering is very difficult in the thinly traded municipal market.
Moody's ratings measure:
default risk of debt issues Moody's measures default risk of debt issues. Moody's only rates bonds, not equity securities.
A 35-year old customer in the 15% tax bracket tells her representative that she wants to buy a tax-sheltered investment. The representative explains that this is not suitable, but the customer insists that the representative execute the trade. The representative should:
execute the order, but note his or her exception in the customer account file If the customer tells you to do something, do it! It's the customer's account, not yours. Since you don't agree with the customer's decision, cover your actions by documenting your exception to the trade in the customer file.
A customer sells 1 ABC Feb 45 Call @ $4 when the market price of ABC is 46. If the market value of ABC falls to $41 and stays there through February, the customer will:
gain $400 If the market falls to $41, the 45 call expires "out the money" and the writer retains the $400 premium.
A U.S. soft drink manufacturer buys a French soft drink manufacturer. This is a:
horizontal merger A horizontal merger is where 2 companies in the same industry merge, usually to achieve economies of scale.
A variable life policy will remain in force:
if the policy has sufficient cash value to pay the premium
If Treasury bill yields are rising at auction, this indicates that:
interest rates are rising while bill prices are falling
Jack Jones, age 82, has an individual account at your firm. He gives a full written trading authorization to his son, Jack Jones Jr. under a durable power of attorney. Upon the death of Jack Jones, the power of attorney:
is void Any power of attorney granted by a customer "dies" when that customer dies. The difference between a "durable" and a "non-durable" power of attorney only relates to mental incapacitation. If an individual that has granted a non-durable power of attorney becomes mentally incapacitated, then that power of attorney becomes void. If an individual that has granted a durable power of attorney becomes mentally incapacitated, the power of attorney continues in effect.
The Bond Resolution is the contract between the:
issuer and bondholder The Bond Resolution is the contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions.
Monies that have accumulated in a Coverdell Education Savings Account that are not used by the beneficiary to pay for qualified educational expenses:
may be transferred to a Coverdell Education Savings Account for a sibling that so qualifies without any tax liability
Customer account statements must be sent:
monthly for accounts with trading activity and quarterly for inactive accounts Customer account statements must be sent in any month in which a trade occurs. If the account is inactive (no trading), then they must be sent at least quarterly.
Payments received by the owner of a non-tax qualified variable annuity are:
only taxable to the extent of earnings above the holder's cost basis Funds paid into "non-tax qualified" retirement plans are not tax deductible. Any earnings build up tax deferred. When distributions are taken, the portion that represents the return of original after tax investment is not taxed (it is the investor's cost basis); while the portion that represents the tax deferred earnings buildup is taxable.
During the accumulation phase of a variable annuity:
payments can be made into the plan; but distributions may not be taken from the plan
Hedge funds are:
private investments that are available only to accredited investors (institutions or wealthy individuals)
A registered individual leaves the industry, and is concerned that he might not reassociate with another member firm within 2 years. The individual approaches a friend at another member firm to hold his license during his absence. This action is:
prohibited FINRA prohibits "parking" of licenses when an individual is not affiliated with a member firm. If that person remains unaffiliated for 2 years, all licenses lapse.
As interest rates fall, preferred stock prices will:
rise Preferred stock is a fixed income security whose prices move inversely with interest rates. As interest rates fall, preferred stock prices rise, so that the preferred will give a yield that is competitive with the current market.
Of the following choices, the only method that will raise new funds for a corporation is to:
sell additional common shares through a rights offering
Bonds quoted on a yield to maturity basis are generally:
serial bonds
A new customer calls a representative and says the following: "I own 1,000 shares of DEF stock, which is currently held at another broker-dealer. I want to sell the shares at the market." The representative accepts the order from the customer. The order ticket should be marked:
short sale When a customer sells, the order ticket must be marked either "long" or "short." A sale is marked long if it is reasonably expected that the customer will deliver the shares on settlement. A sale is marked "short" if the shares must be borrowed to settle the sale. Because the shares are sitting at another broker-dealer, they cannot be delivered to this firm by settlement (the account transfer process takes at least 4 business days and typically takes longer). Thus, the order ticket must be marked "short." Also note that there is no such thing as "long-exempt" and the "short-exempt" order ticket marking is only used for short sales of stocks that have dropped by 10% or more in value, where the sale must be done on an up-bid under Regulation SHO.
A fund which invests in one type of industry or one geographic area is known as a:
specialty fund A specialty fund is one which invests in one type of industry or one geographic area. Don't confuse it with a special situations fund which invests in bankrupt companies or companies in takeover situations.
When comparing a "Convenience Account" to Transfer on Death (TOD) registration:
the named person in a Convenience Account has no ownership rights upon the owner's death, while the named person in a TOD account does
To open a partnership account, the social security number(s) or tax identification number to be used is (are) the number(s) of:
the partnership To open an account for any legal business entity such as a corporation, partnership or trust, the tax identification number of the entity must be used. Note that when these business entities are formed, they must apply to the IRS at that time for a tax identification number. Social security numbers are only used for accounts opened in the names of humans!
What is the maximum potential loss for a customer who is short 100 shares of ABC stock at $39 and short 1 ABC Jan 35 Put at $6?
unlimited If the market rises, the put contract expires, but the customer is responsible for covering his or her short stock position. The potential loss on the remaining short stock position is unlimited, since the market can rise an unlimited amount.
A customer buys 100 shares of XYZ at $49 and buys 1 XYZ Jan 50 Put @ $5. The maximum potential gain is:
unlimited Since the customer has a long stock position, his potential gain is unlimited. If the market moves up, he or she lets the put expire "out the money" and sells the stock in the market at the higher price.
What securities offering must be registered with the SEC?
Rule 415 Shelf offerings under Rule 415 allow seasoned issuers to file a blanket registration statement that goes on the SEC's "shelf," good for 3 years. The issuer simply gives 2 day notice to the SEC and can sell. This is a simplified registration process. Regulation D is the private placement exemption from registration. It basically states that private placements that are not offered to the general public are exempt from registration. Rule 506 (the major rule under Regulation D) states that if an offering is made to a maximum of 35 non-accredited investors and to an unlimited number of accredited (wealthy) investors, then it is exempt from SEC registration. Rule 144 allows holders of restricted private placement stock to sell the shares in the market, as long as the company has gone public. If the provisions of the rule are followed, the SEC allows the transfer agent to register the shares, and they become freely tradable in the market. No registration statement is required to do this. Rule 144A states that issuers can sell "private placements" in large block sizes (typically $500,000 or more per unit) to QIBs - Qualified Institutional Buyers - without having to register them with the SEC. A QIB is an institution with at least $100 million available for investment. Rule 144A solves a problem with private placements for QIBs - the fact that they are illiquid. Rule 144A issues can be traded from QIB to QIB in the "PORTAL" market. This opens up the market for these securities to large institutional investors, who would not buy unless they knew they could sell the holding at will.
A small business owner of a firm that has 25 employees wants to establish a retirement plan and make contributions for her employees. What type of plan can the employer establish?
SEP IRA A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $57,000 in 2020). The employer sets the actual contribution percentage, which must be the same for all employees. A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a smaller business that has variable cash flow. A Traditional or Roth IRA can only be set up by the individual who is employed - it cannot be set up by the employer. A 403(b) plan can only be established by a not-for-profit entity. It cannot be set up by a for-profit company.
State-sponsored education savings programs that permit contributions to build tax-deferred are known as:
Section 529 plans State sponsored education savings programs are "Section 529" plans. Coverdell Education Savings Accounts are a Federal plan.
Under IRS rules, if a customer selling shares of stock wishes to use specific identification instead of FIFO for cost basis reporting, the broker-dealer effecting the trade must be notified of this no later than:
Settlement date If a customer says nothing at the time of a stock sale, IRS rules requires that FIFO be used to determine which shares are sold. If the customer wishes to use specific identification instead, this must be chosen by the customer no later than settlement date.
A political subdivision wishes to issue a bond backed by taxes on cigarettes and gasoline. It would most likely issue a(n):
Special tax bond A municipal bond which is secured by taxes other than ad valorem taxes is a special tax bond. These "special taxes" are typically excise taxes on tobacco, alcohol and gasoline.
A Real Estate Limited Partnership would most likely invest in:
Stip malls and apartment houses An "existing housing" RELP (Real Estate Limited Partnership) invests in office buildings, shopping centers, apartments building, etc, for rental income. The RELP uses mortgage financing to buy the properties, so there are interest deductions, as well as depreciation deductions. RELPs do not buy single family homes (too hard to manage) and do not invest in securities such as bonds and REITs.
Which of the following securities cannot be margined?
Structured products Because money market instruments are "safe," they can be margined - meaning that the brokerage firm can lend money against these securities held as collateral for the loan. Government securities, agency securities, investment grade money market instruments, investment grade corporate bonds and listed stocks are the marginable securities. As a general rule, structured products cannot be margined because they are not readily transferable.
