Sie Section 2 and 3

A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are A) Treasury receipts. B) Treasury bills. C) collateralized obligations. D) Treasury STRIPS.

A Explanation Brokerage firms can create a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds placed in trust at a bank. They then sell separate receipts against the principal and coupon payments the notes and bonds represent.

An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of A) 5.6%. B) 7.8%. C) 7.4%. D) 4.5%.

A Explanation Current yield is determined by dividing annual interest (coupon) payment by the current market price of the bond ($50 ÷ $900 = 5.6%). Years to maturity is not a factor in calculating current yield.

Exchange-traded funds are priced A) by supply and demand where transaction prices may be higher or lower than the fund's NAV. B) using forward pricing so that all transaction prices equal the fund's NAV. C) by supply and demand insuring transaction prices equal to the fund's NAV. D) using forward pricing where transaction prices may be higher or lower than the fund's NAV.

A Explanation ETFs trade on exchanges and are priced by supply and demand, like any other exchange-traded product. With pricing influenced by market forces, transaction prices at any given time might be more or less than the fund's NAV.

Which of the following must be signed by a customer wanting to open a margin account? A) Credit and hypothecation agreements B) Loan consent and hypothecation agreements C) Risk disclosure document and credit agreement D) Credit and loan consent agreements

A Explanation Opening a margin account requires that the customer sign the credit agreement and the hypothecation agreement. The loan consent form (agreement) is optional. While the risk disclosure document must be received and attested to as read by signing the credit agreement, it need not be signed.

Repurchase agreements and reverse repurchase agreements are A) money market instruments. B) intermediate-term notes. C) long-term bonds. D) equity instruments.

A Explanation Repurchase (repo) agreements and reverse repurchase agreements are short-term debt securities and are, therefore, a type of money market instrument.

Which of the following are considered systematic risks—those that would impact all businesses? Market risk Inflation risk Regulatory risk Business risk A) I and II B) I and IV C) II and III D) III and IV

A Explanation Systematic risk is the risk that changes in the overall economy will impact securities regardless of the company's business. Examples of that are inflation (purchasing power) risk, interest-rate risk, and market risk. Business risk and regulatory risk are examples of nonsystematic risk, the kind of risk that might be unique to certain businesses or industries.

According to the U.S. Commerce Department, the economy is in a depression when a decline in real output of goods and services lasts A) 18 months or more (6 quarters). B) 6 months or more (2 quarters). C) 9 months or more (3 quarters). D) beyond 12 months (4 quarters).

A Explanation The U.S. Commerce Department defines a depression as a decline in real output of goods and services lasting 18 months or more (6 quarters).

Define rule 144 Discuss the privilege's and restrictions

-Affiliates: have volume restrictions (1% every 90 days, 4 times a year), restricted stock (unregistered) held by an affiliate (insider), there is a six-month holding period Control stock would be registered shares held by an affiliate. There is no holding period -Nonaffiliates holding restricted stock (unregistered) shares must wait six months (without volume restrictions) thereafter.

Which of the following are municipal securities? A) 529 Savings Plans B) Coverdale Saving Plans C) UGMA Saving Accounts D) UTMA Saving Accounts

A Explanation 529 plans are established by each individual state—therefore they are municipal issues.

All of the following are issuer transactions where the proceeds of the offering go to the issuing company except A) a repurchase agreement (REPO). B) an initial public offering (IPO). C) an additional public offering (APO). D) a subsequent public offering (SPO).

A Explanation APOs, IPOs, and SPOs all result in funds going to the issuer and are, therefore, issuer transactions. A REPO is a money market instrument where money changes hands between the buyer and the seller.

An official statement is a disclosure document that would be used in connection with an offering of which of the following securities? A) Municipal bonds B) Common of preferred stock offered privately C) Limited partnership interests D) U.S. Treasury notes

A Explanation An official statement serves as a disclosure document and contains any material information an investor might need about a municipal bond issue. Municipal bonds are exempt from registration under the Securities Act of 1933.

Which of the following regarding Treasury STRIPS, receipts, bills, notes and bonds is true? A) They all mature at par value. B) They are all backed by the good faith and credit of the U.S. government. C) They all pay semiannual interest payments. D) They are all sold at a discount to par.

A Explanation The only commonality for all of these is that each matures at par. Only T-bills, receipts and STRIPS are sold at a discount to par. Only T-notes and bonds make semiannual interest payments, and though STRIPS, bills, notes, and bonds are all backed by the good faith and credit of the U.S. government, Treasury receipts issued by broker-dealers are not.

An investor owns 500 shares of stock whose current market value is $20 per share. The stock undergoes a split, after which the investor owns 400 shares. What is the new price of the investor's stock? A) $25 per share B) $16 per share C) $10 per share D) $40 per share

A Explanation The rule for stock splits is that the total value of the stock position must be the same before and after the split. In the case of this reverse, uneven split, the total value of the stock before the adjustment was $10,000. For the 400 shares after the split to be worth $10,000, the price would have to be adjusted to $25 per share ($10,000 ÷ 400 shares = $25).

The sales charge for Class A shares may not exceed A) 8.5% of the total investment. B) 6.25% of the NAV of the shares purchased. C) 8.5% of the NAV of the shares purchased. D) 6.25% of the total investment.

A Explanation Though they are almost always much smaller, sales charges for Class A shares may not exceed 8.5% of the money invested. For example, if an investor spends $1,000 for Class A shares, no more than $85 may be charged as a sales load.

All of the following are taxable to the investor except A) capital gains distributions. B) stock dividends. C) cash dividends. D) semiannual interest payments.

B Explanation A stock dividend is payment of additional shares of the issuer to the stockholder rather than payment of cash. The price of the stock is adjusted so that the total value of the outstanding stock is the same before and after the dividend is paid. Stock dividends are thus not taxable.

Index and foreign currency options must be settled in A) banker's acceptances. B) cash. C) securities comprising the index and the foreign currency. D) the underlying security.

B Cash Explanation Index and foreign currency options are cash settled. Instead of shares of stock being delivered as a result of the exercise, cash must be delivered by the party assigned (short the contract). This is because delivering all of the components of an index is not possible and delivering foreign currency would require exchanging one currency for another, and possibly having banking relationships abroad. Settling in cash (U.S. dollars) facilitates the exercise and assignment process much easier for U.S. investors.

A market maker A) acts as an agent to buy and sell for public customers who will hold their own securities. B) can only be an institution doing proprietary trading. C) trades in a proprietary account to facilitate trading of a security and provide liquidity. D) trades in a customer's account standing ready to buy or sell at their own discretion.

C Explanation Any entity, individual or institution, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security is known as a market maker or trader.

John Bourne places a buy limit order at 42 when the market price of the stock is at 45. Which of the following best describes how the order would fill? A) The order would be filled immediately because the market price is already above 42. B) The order would be filled at the next available price after the stock price drops to 42. C) The order can only be filled at a price of 42 or lower. D) The order would be filled between when the stock price is between 42 and 45.

C Explanation Buy limit orders are placed below the current market price and fill at the stated price or lower.

All of the following are exempt from the Federal Reserve Board (FRB) Regulation T margin requirements except A) municipal bonds. B) Treasury bills. C) corporate stocks. D) government agency issues.

C Explanation Certain securities are exempt from the FRB's Regulation T initial margin requirements. Those exempted would include U.S. Treasury issues, government agency issues, and municipal securities. Corporate securities are not exempt; for corporate securities to be purchased on margin, buyers must meet the requirements of Regulation T.

For registered shares held by an affiliate (known as control stock), which of the following applies? A) No holding period or any volume restrictions B) Six-month holding period, with volume limits thereafter C) No holding period, but volume limits always apply D) Six-month holding period, with sales allowed freely thereafter

C Explanation Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate.

Limited partnerships sold through private placements involve A) a large group of investors, each contributing a large sum. B) a small group of investors, each contributing a small sum. C) a small group of investors, each contributing a large sum. D) a large group of investors, each contributing a small sum.

C Explanation Limited partnerships sold through private placements generally consist of a small group of accredited investors, each contributing a large sum to the partnership.

When a bank lends money to a broker-dealer for the purpose of lending to margin account customers, the bank is lending at which of the following rates? A) Federal funds B) Prime C) Broker call loan D) Discount

C Explanation Money lent to broker-dealers by banks for the purpose of making loans to margin account customers, the money is borrowed at the broker call loan rate (broker loan rate or call rate).

Restricted shares, those that are unregistered, meaning that they were not attained in a public offering, may be sold by a nonaffiliate A) at any time but with volume restrictions. B) after holding them for six months but then subject to volume restrictions. C) after holding them for six months and freely thereafter. D) freely, with no holding period or volume restrictions.

C Explanation Nonaffiliates holding unregistered shares must wait six months before divesting of those shares, but because they are nonaffiliates, they may sell freely (without volume restrictions) thereafter.

A common stockholder's voting rights apply to which of the following? Election of the board of directors (BOD) Declaration of dividends Authorization or issue of more common shares Changing suppliers for raw material or parts used in production A) II and IV B) I and IV C) II and III D) I and III

D Explanation Common stockholders never vote directly on dividend payment or size. They may elect the BOD indirectly influencing the policy on payment of dividends) and may vote on issues concerning the company's capitalization, such as the issuance of more common stock. They do not vote on day-to-day business decisions, such as suppliers used.

All of the following actions must be completed before a customer enters the first option order except A) completion of the new account form. B) delivery of an Options Clearing Corporation (OCC) disclosure booklet. C) approval by a branch office manager (BOM) or registered options principal (ROP). D) completion of (signing of) the options agreement.

D Explanation Customers do not have to complete (sign) the options agreement before entering an order, although under the rules, the agreement must be signed and returned by the customer within 15 calendar days of account approval.

Which of the Bond types require voter approval? Why?

Municipal general obligation (GO) bonds require voter approval because the debt service for these bonds (principal and interest payments) is funded by the taxes collected by the municipal issuer. Voters pay these taxes.

Which of the following choices would a registered representative be able to make for a customer in a nondiscretionary account? Which of the following choices would a registered representative be able to make for a customer in a discretionary account?

NON: The time of execution of the trade At what price to execute the trade DIS: Which security to buy How much of the security to buy

Define Negotiable? Define Secondary market? Define Unsecured?

Negotiable means that it can be traded in the secondary market (Investor to investor; aftermarket or unsecured means that it is backed only by a promise to pay—a bank's good faith and credit.

Which of the following securities is exempt from the Regulation T margin requirements but still subject to an initial margin requirement as determined by the broker-dealer?

T-notes

The buyer of a put has the ________ to _____ the stock. The seller of the put has the __________ to _______ the stock. The buyer of the call has the _________ to ______ the stock. The seller of the call has the __________ to _______ the stock.

The buyer of a put has the right to sell the stock. The seller of the put has the obligation to buy the stock. The buyer of the call has the right to buy the stock. The seller of the call has the obligation to sell the stock.

Define the formula for total return?

The formula for total return is dividends plus capital gains divided by amount invested.

An unsecured promissory note issued by a bank that can be traded in the secondary market is known as_____?

negotiable CD

A tombstone advertisement would be expected to include all of the following information except A) any inherent risks associated with the offering or the issuer offering the securities. B) the price or price range at which the securities are expected to be offered. C) an advisory that the advertisement is neither an offer to sell nor a solicitation of an offer for any of these securities. D) the name of the issuer and underwriters if they are being used to assist in the offering.

A Explanation While any inherent risks associated with the issuer or the securities the issuer is offering would be expected to be shown in a prospectus, they would not be expected to be found nor is it required that they be shown in a tombstone advertisement. Each of the remaining answer choices shows information expected to be shown in these ads.

LMN Corporation has a $60 par, 4% preferred stock currently trading at $45 per share. Its annual dividend is A) $2.40. B) $1.80. C) $24.00. D) $4.00.

A For preferred shares, the annual dividend is stated as a percentage of par. In this case, 4% of par value of $60 equals $2.40.

All of the following may be callable except A) common stock. B) preferred stock. C) corporate bonds. D) muni bonds.

A (Common, not callable) Explanation Fixed income and debt securities may have a call feature. Common stock does not.

Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle? A) Adjustment bonds B) U.S. Treasury notes C) AA-rated mortgage bonds D) AA-rated debentures

A (adjustment = income which is bad for predictable income) Explanation Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. Therefore, the interest payments are not predictable, and they are not suitable for customers seeking income.

For each transaction, a customer must be sent or given a written confirmation of the trade at or before the completion of the transaction, the settlement date. Information on that trade confirmation would include the markup (markdown) charged on a principal transaction. the commission charged on an agency transaction. the number of bonds purchased in a bond trade. the Committee on Uniform Securities Identification Procedures (CUSIP) number (if any). A) I and IV B) II and IV C) II and III D) I and III

B Explanation Commissions for agency transactions are shown on confirms but not markups or markdowns charged in principal transactions. In a bond trade, the par value of the bond purchase (or sale) is confirmed, not the number of bonds. If the security has one, the applicable CUSIP number is included.

A shareholders' meeting for ABC Corporation will take place in eight days. A customer whose stock is being held in street name has not returned the proxy statements. Which of the following is true? A) The member firm may not vote the shares under any circumstances. B) The member firm may vote the shares as it wishes on minor matters. C) The member firm votes the shares as recommended by the issuer's management. D) The member firm must ascertain how the investor wishes to vote the shares.

B Explanation If an owner of shares held in street name has not returned proxy statements earlier than 10 days before a shareholders' meeting, the member firm holding the shares may vote them as it sees fit, provided the matters voted on are minor. If they are major—for example, changing the direction of the business, offering additional stock, effecting a merger—the member firm may not vote the shares at all.

Index and foreign currency options must be settled in A) banker's acceptances. B) cash. C) the underlying security. D) securities comprising the index and the foreign currency.

B Explanation Index and foreign currency options are cash settled. Instead of shares of stock being delivered as a result of the exercise, cash must be delivered by the party assigned (short the contract). This is because delivering all of the components of an index is not possible and delivering foreign currency would require exchanging one currency for another, and possibly having banking relationships abroad. Settling in cash (U.S. dollars) facilitates the exercise and assignment process much easier for U.S. investors.

A restricted person in the issuing of new securities under Rule 5130 would include all of the following except A) a broker-dealer buying for its own account. B) a portfolio manager buying for a portfolio she manages. C) a registered representative buying for his own account. D) a roommate of a registered representative.

B Explanation It is OK for portfolio managers to buy for portfolios they manage, but it is not OK for them to buy for their own account. Buying for other people in the industry and those supported by or under the support of those in the industry would also be prohibited. Because roommates of a registered representative would be codependent, they would also be prohibited.

The minimum initial requirement when buying 100 shares at $15 in a new account would be A) $2,000. B) $1,500. C) $375. D) $750.

B Explanation The FINRA minimum initial deposit for a long purchase in a margin account is $2,000 or 100%, whichever is less.

An investor buys 1 DWQ May 70 call at 2, giving the investor the right to buy 100 shares of DWQ at $70 per share. All the specifications of the transaction are set or standardized by the Options Clearing Corporation (OCC) except A) contract size of 100 shares. B) premium of 2. C) expiration date in May. D) exercise price of 70.

B Explanation The OCC sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market.

For ETFs, the phrase "tax efficiency" can best be described by which of the following concepts? A) These exchange-traded products can be purchased on margin, allowing for a smaller initial investment. B) Usually, for ETFs, there are no tax consequences for investors until the shares are sold. C) All transactions in ETFs are commissionable, and sales charges do not apply. D) ETFs generally have reportable tax gains passed on annually.

B Explanation The single greatest advantage associated with ETFs is the fact that while they can pass on capital gains from time to time, creating tax consequences in that year, they rarely do. Therefore, there would be no expected tax consequences until the shares are sold. This is the tax efficiency generally associated with ETFs.

An investor owning 500 shares of stock worth $40 per share receives notice that the stock will undergo a split. When the split is completed, the investor owns 400 shares of stock worth $50 per share. The split must have been a forward split. a reverse split. an uneven split. an even split. A) II and IV B) II and III C) I and IV D) I and III

B Explanation This split reduced the number of shares, which makes it a reverse split. This investor now owns 400 shares when previously they had 500 shares, which would be expressed as a 4:5 split. Because neither number in the ratio is 1, it is an uneven split.

All of the following securities are backed by the full faith and credit of the U.S. government except A) Treasury notes. B) Treasury receipts. C) Treasury bonds. D) Treasury STRIPS.

B Explanation Treasury receipts are issued by broker-dealers, and they are backed by the good faith and credit of those that issue them. Treasury STRIPS are the U.S. Treasury Department's version of these, and therefore they are backed in full by the U.S. government. Treasury bills, notes, and bonds are backed in full by the U.S. government.

A corporation with 1 million shares of stock outstanding wishes to sell another 250,000 shares. When management conducts a rights offering, a shareholder owning 100 shares will be given stock rights to purchase how many additional shares? A) 250 shares B) 25 shares C) 125 shares D) 100 shares

B The shares outstanding in this case will go from 1,000,000 to 1,250,000. This investor must thus go from owning 100 shares out of 1,000,000 to 125 shares out of 1,250,000. This would require that the investor be able to purchase an additional 25 shares. 1m to 125m 100 to 125 (meaning +25)

Commercial paper is A) unsecured debt with a maximum maturity of one year. B) unsecured debt with a maximum maturity of nine months. C) secured debt with a maximum maturity of one year. D) secured debt with a maximum maturity of nine months.

B (270 days = 9months) Explanation Issued by corporations, commercial paper, also known as prime paper or promissory notes, are unsecured money market instruments with maximum maturities of 270 days (nine months).

Exchange-traded funds (ETFs) offer several attractive advantages over mutual funds. All of the following would be advantages that ETFs typically have over mutual funds except A) the ability to buy on margin. B) lower operating cost than many mutual funds. C) trading costs for active traders. D) intraday pricing for active traders.

C Explanation Active traders may run up higher expenses because of being charged a commission to buy and then a commission to sell. The other options are all advantages of ETFs versus mutual funds.

In a limited partnership, which of the following best describes who is responsible for tax consequences of the business? A) The limited partners B) The general partners C) The investors D) The business

C Explanation All tax consequences of the business flow through proportionality to the investors. All partners will have some tax impact, not just the general or just the limited partners.

A hedge fund is permitted to do which of the following that a mutual fund is not permitted to do? A) Include both stocks and bonds in its portfolio B) Invest in equity and debt securities C) Invest in commodities and currencies D) Have pooled and professionally managed portfolios

C Explanation All the answer selections are applicable to both hedge funds and mutual funds except investing in commodities and currencies. Mutual funds are limited to investing in securities only. While commodities and currencies can be investments, they are not securities.

A customer who has written an option contract receives an assignment notice. This customer is A) the party who must notify the Options Clearing Corporation (OCC) that they intend to exercise the contract. B) now obligated to short the stock at the current market value. C) now obligated to either buy or sell the underlying stock at the strike price. D) the party who may now assign the contract to another investor.

C Explanation Only the owners of options contracts can exercise them. When this occurs, the writers of the contracts are assigned and must fulfill their obligation to perform. Performance (buy or sell) is determined by whether they have written a call (short call - obligated to sell) or a put (short put - obligated to buy).

Obtaining the financial status of the customer, and whether or not they meet income and net worth criteria, could be required for all of the following except A) oil and gas limited partnerships. B) real estate limited partnerships. C) real estate investment trusts (REITs). D) equipment leasing limited partnerships.

C Explanation Real estate investment trusts (REITs) do not require proof of financial status for investment. Limited partnerships and other DPPs can, particularly those that are offered privately (as private placements) as opposed to those that are offered publicly (by public offering).

The coupon rate on a debt security represents A) the principal amount due to the investor at maturity. B) the interest rate the investor has agreed to pay the issuer. C) the interest rate the issuer has agreed to pay the investor. D) the principal amount loaned to the issuer.

C Explanation The coupon rate on a debt security represents the interest rate the issuer has agreed to pay the investor for use of the funds loaned to the issuer.

When speaking to a customer about exchange-traded funds (ETFs), a registered representative could make which of the following correct statements? A) ETFs can be purchased only by paying a sales charge added to the NAV. B) ETFs cannot be purchased using traditional limit or stop orders. C) ETFs have different potential tax consequences than mutual funds. D) ETFs cannot be bought on margin.

C Explanation The potential tax consequences of owning an ETF can be different than those experienced when owning mutual funds. While an ETF can make a capital gains distribution, they generally do not—unlike a mutual fund, which generally would make such distributions on an annual basis. ETFs can be traded like other exchange products using traditional stock-trading techniques and order types and are priced by supply and demand. Customers pay commissions, not sales charges.

The minimum initial requirement when purchasing 100 shares at $30 in a new account would be A) $1,500. B) $375. C) $2,000. D) $750.

C Explanation The requirement is normally 50% but not less than $2,000 unless the purchase price is less than $2,000. Then only 100% of the purchase price would be required.

A registered representative opens a new options account for a customer. In which order must the following actions take place? Obtain approval from the branch manager Obtain essential facts from the customer Obtain a signed options agreement Enter the initial order A) II, I, III, IV B) I, II, IV, III C) II, I, IV, III D) I, II, III, IV

C Explanation The steps or order of events to open an options account would occur in the following order: obtain essential facts about the customer, give the customer an options disclosure document (ODD), have the manager approve the account, enter the initial order, and have the customer sign the options agreement within 15 calendar days.

An investor makes several statements regarding what they know about exchange-traded funds (ETFs). All of them are correct except A) I won't have to pay any sales charges as I do with mutual funds, but I will have to pay commissions. B) I'll be able to buy or sell them throughout the trading day like stocks trading on an exchange. C) I can't buy them on margin because they represent an entire basket of stocks like mutual funds do. D) I can expect them to have lower expense and operating costs than mutual funds.

C Explanation Though mutual funds cannot be purchased on margin, ETFs can be. They can be traded throughout the trading day with purchases and sales commissionable transactions. They tend to have low expense ratios.

MOS stock is trading at 55. A March 55 call contract would therefore be trading A) at par. B) in the money. C) at the money. D) with intrinsic value.

C Explanation When an option contract strike price is the same as the underlying stocks current market value, the contract is right at the money. When a contract is right at the money, it has no (zero) intrinsic value.

A strong U.S. dollar leads to more A) U.S. exports and a balance of payments deficit. B) U.S. imports and a balance of payments surplus. C) U.S. imports and a balance of payments deficit. D) U.S. exports and a balance of payments surplus.

C Explanation When the dollar is strong, it is more affordable for U.S. consumers to buy more foreign goods, so U.S. imports increase. As more imported goods flow in, more money flows out—deficit.

DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past three years but now is in a position to resume paying them again. Before paying common shareholders a dividend, the company would be required to pay the preferred shareholders A) $1.00. B) nothing. C) $4.00. D) $2.50.

C Explanation With noncumulative preferred stock, missed or skipped dividends need not be paid or made up. However, in order to pay common shareholders in any year, preferred shareholders must receive their full dividend for that year. While it can be paid in one annual payment, quarterly, or however the board approves it to be paid, the total in this case would be $4.00. 4% × $100 par value = $4.00.

n an LP, which of the following is true? A) Only losses but not gains flow through to the individual partners. B) Any gains realized from a limited partnership are tax exempt. C) The partnership entity is not responsible for paying taxes on gains. D) The partners are not responsible for paying taxes on gains.

C (individual not partnership entity) Explanation Both gains and losses from an LP flow through to the individual partners. Gains are taxable, and any taxes due are the responsibility of the individual partners, not the partnership entity.

An investor short a January 30 call at 4 has a maximum gain potential of A) 26 points or $2,600. B) 30 points or $3,000. C) 4 points or $400. D) 34 points or $3,400.

C (max gain for a short is premium) Explanation Maximum gain for any short option position (call or put) is the premium initially received when the contract was written. In this case, it is 4 points or $400. This would occur if, at expiration, the contract was at or out of the money and, therefore, left unexercised.

Which of the following must precede the first trade in an account? A) Filing of the account information with the applicable self-regulatory organization (SRO) B) Registered representative's signature on the new account form C) Customer's notarized signature on the new account form D) Approval of the new account by a principal

D Explanation All accounts must be approved by a principal before the first trade. Neither the customer nor the registered representative need sign the new account form, and no self-regulatory organization (SRO)—requires the filing of new account information with them.

A customer has given permission for securities in an investment account to be used for the purpose of other customers who want to borrow them in order to sell those securities short. This would have entailed the customer signing A) a hypothecation agreement. B) a credit agreement. C) a margin account form. D) a loan consent form.

D Explanation Allowing one's securities to be loaned to others who want to borrow them for the purpose of selling them short would entail signing a loan consent form. This is optional and need not be signed to open a margin account or any other.

A customer of a broker-dealer makes it known that they would like to trade options in their account. The first step to accommodate the request is which of the following? A) The registered representative should provide the customer with the options disclosure document (ODD). B) The firm's registered options principal (ROP) should approve the account so trades can occur immediately. C) Options Clearing Corporation (OCC) should be apprised to see if other options accounts are maintained at other broker-dealers. D) The registered representative should determine the suitability of options trading for the customer.

D Explanation Once the customer request being able to trade options in their account, the first step would be for the registered representative to collect all necessary information (financial and nonfinancial) to determine if trading options would be suitable for the customer.

Which of the following projects would be funded by general obligation (GO) bonds? A) Public housing B) Sports stadiums C) Airports D) Public schools

D Explanation Schools are funded by state and local taxes which is what backs GO bonds.

All of the following are exempt from Regulation T except A) GNMAs. B) New York City bonds. C) T-bills. D) NYSE-listed securities.

D Explanation Stocks that trade on the NYSE are subject to Regulation T. Municipals, treasuries, and agencies are exempt.

Which of the following entities considers appeals of decisions made in department of enforcement (DOE) actions? A) Federal Reserve Board (FRB) B) Municipal Securities Regulatory Board (MSRB) C) Federal Bureau of Investigation (FBI) D) The National Adjudicatory Council (NAC)

D Explanation The National Adjudicatory Council (NAC) hears appeals from DOE decisions. An NAC ruling may be appealed to the SEC, then to the appellate courts.

Intangible drilling costs (IDCs) associated with oil and gas DPPs can generally A) not be deducted at all. B) be deducted up to a certain percentage in the earlier years of the program. C) not be deducted until the end of the programs life. D) be deducted completely in the first year of the program.

D Explanation The deduction allowable for IDCs associated with oil and gas DPPs is one of the unique tax advantages of these programs. These costs can be deducted completely in the first year of the program instead of over the life of the program.

A company with previously issued shares outstanding wants to issue more shares to the public. These new shares are issued in what is known as A) a secondary market offering. B) a secondary registration. C) an initial public offering (IPO). D) An additional public offering (APO).

D Explanation The first time that a company issues shares to the public, it engages in an IPO. Later offerings are known as subsequent primary offerings (SPOs) or APOs. The IPO and any SPO or APO are all issuer transactions and are, therefore, done in the primary market.

Your client, Chue Xiong, is a very wealthy, sophisticated investor and has many years of experience investing in aggressive strategies. He is looking for very high rates of return on a very large investment and is willing to have the money tied up for a few years. Which of the following would be suitable for him? A) A broad-based domestic stock mutual fund B) A corporate bond fund C) A mutual fund that invest solely in large cap value stock D) A hedge fund

D Explanation The mutual funds are not likely to get high rates of returns, but because Xiong is comfortable with high-risk investment strategies and having his money locked up for a long time, a hedge fund could work for him.

XYZ Corporation is guaranteeing a debt issue for the IHG Company. Regarding these bonds, which of the following is true? A) These bonds are secured, with the value of the guarantee being as good as the strength of XYZ. B) These bonds are secured, with the value of the guarantee being as good as the strength of IHG issuer. C) These bonds are unsecured, with the value of the guarantee being as good as the strength of IHG the issuer. D) These bonds are unsecured, with the value of the guarantee being as good as the strength of XYZ.

D Explanation These are guaranteed bonds where the value of the guarantee is only as good as the financial strength (good faith and credit) of the company making the guarantee—in this case, XYZ Corporation. Because these bonds are backed by the good faith and credit of XYZ and not by any tangible asset, they are unsecured debt instruments. Always remember that even though the word "guaranteed" is used to describe such issues, the bonds are unsecured debt.

What are the two basic types of return on an investment? A) Dividends and interest B) Short term and long term C) Interest and principal D) Capital gains and income

D Explanation Upon the purchase of a security, the investors may receive dividends or interest, which are forms of income, or they may sell the security for a different price than was paid for it, which represents a capital gain or loss.

When an issuer has equipment trust certificates outstanding, title to the assets backing the certificates are held in trust. the equipment is held in trust. the assets can be repossessed and sold by the trustee. the certificates are unsecured because they represent the debt owed on the assets. A) II and III B) I and IV C) II and IV D) I and III

D Explanation When equipment trust certificates have been issued, the titles to the assets (not the actual equipment) backing the certificates are held in trust. If the issuer fails to make the payments on the equipment, it can be repossessed and sold to pay off the debt held by the certificate holders. In other words, it is the equipment acting as the collateral that secures these loans.

With interest rates in the marketplace at 7%, it could be expected that in the secondary market, a bond carrying a 5% coupon would trade A) upward in price. B) unaffected by the changing interest rates. C) only in accordance to supply and demand. D) downward in price.

D Explanation While bond prices like those of other securities are impacted by supply and demand, they also have a unique inverse relationship to interest rates. As interest rates rise in the marketplace, the prices of bonds trading in the secondary market will fall and as interest rates fall in the marketplace, the prices of bonds trading in the secondary market will rise.

Which of the following would be included in a mutual fund's list of expenses? Shareholder records and service Investment advisor's fee Broker-dealer sales charges Underwriter's sales loads A) III and IV B) I and IV C) II and III D) I and II

D Fund expenses: 1 2 Investor expenses: 3 4 Explanation Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor.

A registered representative is explaining discretionary and nondiscretionary accounts to a customer. Only one of the following statements is accurate and can be made by the registered representative. Which is it? A) If I decide that the account should be a discretionary one you will no longer be able to enter orders yourself. B) In a discretionary account you will have the opportunity to approve any order I want to enter before I enter it. C) I decide if the account should be set up as discretionary or nondiscretionary, but must do so in your best interest. D) In a nondiscretionary account no order can be entered without your prior approval.

D In a nondiscretionary account no order can be entered without the customer's prior approval. In a discretionary account the customer's prior approval is not required. Only the customer can decide if the account should be a discretionary one and grants that discretion with a limited power of attorney giving trading authorization to the registered representative. Even in a discretionary account the customer may still enter their own orders.

A company's board of directors (BOD) approves a dividend payment. When this occurs it is recognized as the A) record date. B) dividend disbursement date. C) ex-dividend date. D) declaration date.

D (Declare dividends) Explanation When a company's board of directors (BOD) approves a dividend payment it is recognized as the date the dividend was declared; declaration date.

Which of the following statements regarding real estate investment trusts (REITs) are true? Hybrid REITs typically invest in both commercial property and residential property. Some REITs hold no real property but hold mortgages on commercial property instead. Hybrid REITs can hold only residential property and mortgages on residential property. REITs can pay dividends to shareholders and make capital gains distributions. A) I and IV B) II and III C) I and III D) II and IV

D (Mortgage Commerical, dividends capital) Explanation Equity REITs typically hold commercial property rather than residential property. Mortgage REITs hold mortgages on commercial property, and hybrid REITs do both. Dividend disbursements, as well as capital gains distributions, can be made to shareholders.

Which of the following accounts would allow the assets of a single father's account to go directly to his daughter while avoiding probate but not a let her have access while he is alive? A) JTWOS B) TIC C) Individual with POA D) Individual with TOD

D (Transfer on death) Explanation Individual with TOD (transfer on death) exactly meets his requirements; JTWROS and TIC and individual with POA would all allow the daughter access to the account while he is still alive.

Define financial risk

Financial risk is the risk that an issuer would not be able to make principal and interest payments.

Which bonds have no coupon and make no regular interest payment?

STRIPS sold at a deep discount and mature at par value.

When the U.S. government deposits securities with a trustee, against which it issues certificates representing principal payments only, and no regular interest payments, these are known as________?

Treasury STRIPS.