Test 2

A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account. Only the MFP signs the check. According to the MSRB political contribution rules, the contribution would be viewed as a: A $400 contribution from the MFP B $400 contribution from the spouse C $200 contribution from each party, but it must be reported to the MSRB D $200 contribution from each party

A $400 contribution from the MFP If the MFP is the only party who signs the check, the entire amount of the contribution is allocated to the MFP. In this case, the underwriting ban would be triggered since the amount exceeds $250. When both the MFP and her spouse sign the contribution check, the contribution is viewed as being split equally between the contributors. There is no limit if the spouse writes a check from his personal account, rather than the joint checking account.

American Utility Company of Ohio is offering $750,000,000 worth of 8% bonds at a price of 99.25% of par value. An investor buying the bonds will receive yearly interest of: A $80.00 per $1,000 face amount B $99.25 per $1,000 face amount C $750.00 per $1,000 face amount D $1,000.00 per $1,000 face amount

A $80.00 per $1,000 face amount The bonds have a coupon rate of 8%. The bonds pay 8% of their par value of $1,000 each year or $80 (8% of $1,000 = $80) in interest payments.

Which of the following entities typically sponsors a 529 plan? A A state B A mutual fund complex C An employer D A broker-dealer

A A state Although 529 education savings plans are often administered by a third-party vendor such as a mutual fund family, these plans typically are sponsored by a given state. For example, New Jersey sponsors a 529 plan and New York sponsors its own. Note: clients are permitted to invest in 529 plans from states other than their own state of residence.

When interest rates are falling, the market value of existing bonds will: A Increase B Remain stable C Decrease D Fluctuate

A Increase Interest rates and bond prices have an inverse (opposite) relationship. If interest rates are falling, the market value of existing bonds will increase. Conversely, if interest rates rise, existing bond prices will decrease.

MSRB rules do NOT apply to: A Issuers B Broker-dealers that prepare research C Underwriters D Registered representatives

A Issuers

An investor is interested in selling 500 shares of her listed REIT. The sale will be handled in a manner that's similar to the: A Liquidation of a stock on the NYSE B Maturity of a DPP C Liquidation of a hedge fund D Liquidation of a private placement

A Liquidation of a stock on the NYSE A secondary market exists for real estate investment trusts (REITs). The vast majority of REITs trade on the NYSE with prices that are determined by the forces of supply and demand.

Which of the following stipulations is NOT included in a letter of intent? A The maximum time limit for the letter of intent is 13 months. B The letter of intent may be backdated for up to 90 days. C The fund may stop redemptions during the duration of the letter of intent. D The fund may place some of the initially purchased shares in an escrow account to protect against the failure to fulfill the letter of intent.

A letter of intent (LOI) has a maximum duration of 13 months and may be backdated for up to 90 days to include previous purchases. Also, to protect against the client's failure to fulfill the letter of intent, a certain amount of the initially purchased shares may be placed in an escrow account by the customer's broker-dealer. If the terms of the letter are not met, the shares in the escrow account will be liquidated and used to cover any additional sales charges that are due. The letter of intent will not contain a clause which stipulates that redemptions are prohibited during the 13-month period

The minimum denomination for negotiable certificates of deposit is: A $5,000 B $100,000 C $1,000 D $10,000.

B $100,000 The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more

As it relates to private securities transactions that are executed by an associated person of a broker-dealer, compensation does NOT include: A Receiving tax benefits received by the employee B Being paid a commission by the employing broker-dealer C Being paid a commission by another broker-dealer D Being given warrants by another firm

B Being paid a commission by the employing broker-dealer Private securities transactions are those that are executed outside of the regular scope of an associated person's employment with a member firm. If the associated person will be receiving compensation for the transaction, the member must specifically approve it in writing and it must be recorded on the member firm's books for the person to be permitted to participate. Compensation for this activity can come in many forms, including commissions, finders' fees, securities (or the right to receive securities through the receipt of warrants), and tax benefits. However, it does not include commissions received from the person's employing firm. If the associated person will not be receiving compensation for the transaction, the member may still require the associated person to adhere to specific conditions in order to participate in the transaction.

How can a client minimize principal risk in bonds due to fluctuating interest rates? A Buy long-term maturities B Buy short-term maturities C Buy discount bonds D Do periodic trading to lock in maturities

B Buy short-term maturities If an investor buys bonds that have short-term maturities, this will minimize loss in principal due to fluctuating interest rates. The prices of short-term bonds will fluctuate in response to interest rate swings less than the prices of long-term bonds. In addition, premium bonds (those priced above par) are less volatile than discount bonds (those priced below par).

A registered person wants to set up an investment program for a charity and will not be receiving compensation for his service. Which of the following statements is TRUE? A He is required to provide written notification to FINRA. B He is required to provide written notice to his broker-dealer. C He is required to provide verbal notice to his broker-dealer. D He must receive the written approval of his broker-dealer.

B He is required to provide written notice to his broker-dealer. This is a situation which involves a private securities transaction (i.e., a person executing a transaction outside of the scope of his firm's business). Under SRO rules, if a person engages in private securities transactions, he's required to provide written notice to his firm. If he's being compensated for the transactions, he must also receive his firm's written approval and the transactions must be recorded on the firm's books and records. If he's not being compensated, his firm still has the right to impose conditions on his participation.

A registered person of a broker-dealer is considering supplementing his income by working part-time at a local convenience store. To do this, the individual: A Must notify FINRA of the employment B Must provide written notification to his employer C Can simply start the job without any notifying his employer D Must receive written permission from his employer before beginning the job

B Must provide written notification to his employer If a registered person takes on a part-time job, it's considered an outside business activity and requires that he provide written notification to his employer, but not to FINRA. The registered person is not required to obtain his employer's written permission before beginning the work.

Premature withdrawals of earnings from an IRA that qualify for an exception are subject to: A A 10% tax penalty on the amount withdrawn, but not ordinary income taxes on that same amount B Ordinary income taxes on the amount withdrawn, but not a 10% tax penalty on that same amount C Neither a 10% tax penalty on the amount withdrawn nor ordinary income taxes on that same amount D A 10% tax penalty plus ordinary income taxes on the amount withdrawn

B Ordinary income taxes on the amount withdrawn, but not a 10% tax penalty on that same amount

During which phase of the business cycle will an investor experience a decrease in purchasing power? A Contraction B Peak C Trough D Expansion

B Peak The peak is the high point of the business cycle, during which the demand for goods starts to overtake supply. During this phase, prices and inflation are increasing, which results in the decline of the consumer's purchasing power.

The 5% markup policy applies to a: A Purchase of mutual fund shares B Proceeds transaction C New issue of common stock D Municipal bond trade

B Proceeds transaction The 5% markup policy does not apply to any trade requiring a prospectus (new issues, registered secondaries, and mutual funds) or a transaction involving an exempt security (municipal bond). The 5% policy applies to secondary market trades, which include proceeds transactions (using sale proceeds to buy another security) and riskless or simultaneous transactions.

During periods of deflation, the FRB will likely: A Issue new securities B Purchase securities in the open market C Sell securities in the open market D Encourage a rise in interest rates

B Purchase securities in the open market In an effort to stimulate the economy, the FRB will attempt to move into a period of easy money. Easing money (making it available) may be accomplished by purchasing securities in the open market. On the other hand, selling securities, issuing new securities, or encouraging higher interest rates will have an opposite effect.

Broker-dealers are required to send balance sheets to customers every: A 12 months B Six months C Three months D Nine months

B Six months

A customer owns a warrant with a strike price of $50 and the price of the underlying security has increased from $25 to $40. The current intrinsic value of the warrant is: A $25 B Zero C $20 D $10

B Zero The intrinsic value of any derivative (warrant, option, or right) is equal to the security's in-the-money amount. A warrant is in-the-money when the market value of the underlying security is above the strike price. In this question, since the market price of the underlying security is below the strike price, the warrant is out-of-the-money and has no intrinsic value.

Which investment company does NOT charge a management fee? A A closed-end investment company B An exchange-traded fund C A unit investment trust D An open-end investment company

C A unit investment trust

Which of the following situations is an example of reinvestment risk? A The payments on mortgage-backed securities are ending early due to homeowners refinancing the mortgages as interest rates fall. B A bond issuer is having financial difficulties and is unable to make interest and principal payments on its debt. C After interest rates decreased, issuers called their bonds back and issued new bonds with lower interest rates. For bond investors to realize the same return on new bonds, they are forced to purchase lower quality bonds. D An individual purchased a security that ultimately yielded significantly less than another that he could've chosen.

C After interest rates decreased, issuers called their bonds back and issued new bonds with lower interest rates. For bond investors to realize the same return on new bonds, they are forced to purchase lower quality bonds. Reinvestment risk is the result of not being able to reinvest at the same rate after a bond matures or is called. Opportunity risk is the risk that a chosen investment will yield less than another investment that was not chosen. When interest fall, mortgages may be refinanced and paid off early, which results in prepayment risk on mortgage-backed securities. Credit risk occurs when a bond issuer is unable to make payments of interest and principal.

An investment company that is purchased in installments and that matures at a fixed-dollar amount is called a: A Management company B Unit investment trust C Face-amount certificate company D Variable annuity contract

C Face-amount certificate company Face-amount certificate companies issue certificates of the installment type. The investor makes periodic payments and receives a fixed sum at the end of the period. Lump-sum payment certificates are also available.

Which of the following statements is NOT TRUE concerning a clearing corporation? A It offers customers the ability to have real-time trade matching. B It provides trade comparison and reporting services. C It is responsible for automated book-entry changes in the ownership of securities. D It assists broker-dealers in transferring assets in a customer account to another broker-dealer.

C It is responsible for automated book-entry changes in the ownership of securities. The responsibility for automated book-entry changes in the ownership of securities is a function of a depository facility (e.g., the DTC), not a clearing corporation. Each of the other choices are functions of a clearing system, such as the National Securities Clearing Corporation (NSCC).

A customer owns shares of restricted stock and now intends to sell them. If the proper forms are filed with the SEC, the customer may sell these shares: A At any time B Over a 35-day period C Over a 90-day period D Over a 180-day period

C Over a 90-day period Under Rule 144, an investor who intends to sell either restricted or control stock must notify the SEC by filing Form 144 at the time the sell order is placed. Once the filing is made, the customer may sell these shares within 90 days.

The 5% Markup Policy applies to: A A primary distribution (new issue) B A registered secondary distribution requiring a prospectus C Securities quoted on Nasdaq D Municipal securities

C Securities quoted on Nasdaq The 5% Markup Policy does not apply when a security is being issued with a prospectus or for municipal securities. In this example, a prospectus would be required for a primary distribution as well as a registered secondary distribution. Securities quoted on Nasdaq would be the only choice given for which the 5% guideline would apply.

Marking-the-opening is best defined as which of the following? A Trading after the market opens B A broker-dealer making a notation on an order ticket prior to the first trade entered in a securities market C Trading prior to the opening of a securities market to influence the opening price D The first trade that a broker-dealer enters in a securities market

C Trading prior to the opening of a securities market to influence the opening price The execution of a series of trades at or near the opening or closing of trading in an effort to influence the price of a security is a form of manipulation that's referred to as marking-the-opening or marking-the-close. Traders can execute customer orders or change the amount of securities they own to have securities available for customers; however, buying or selling the security to influence its price is considered manipulative.

Confirmations for transactions are sent in: A Written form only B Electronic form only C Written or electronic form D Written and electronic form

C Written or electronic form Confirmations for transactions may be sent in written or electronic form. If sent electronically, and the customer requests the confirmation in paper form, the broker-dealer must send it in paper form as well. Otherwise, the confirmation does NOT need to be sent in both electronic AND written form.

The 5% Markup Policy applies when a member firm: A Sells a mutual fund to a customer B Underwrites debt securities C Underwrites equity securities D Acts as a dealer in a transaction with a customer

D Acts as a dealer in a transaction with a customer A broker is an agent who acts for someone else and receives a commission when a trade is executed. A dealer is a principal who acts for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% Markup Policy, which is a guide broker-dealers must follow. The 5% Markup Policy covers all transactions except municipal bonds and those requiring a prospectus (i.e., the sale of a new issue, mutual fund, and registered secondary). If a member was acting as an underwriter, the firm would be involved in a new issue and, if acting as a sponsor would be involved in the sale of a mutual fund. Since these transactions require a prospectus, they would not be covered by the 5% Markup Policy.

When a brokerage firm executes trades for customers in municipal securities, all material information should be disclosed: A On the business day prior to the trade B At the end of the day that the trade was executed C On the business day after the trade was executed D At or prior to the time of the trade

D At or prior to the time of the trade In addition to the best execution rule for municipal securities, a municipal securities dealer is required to disclose to a client all material information that's either known or reasonably accessible to the market. These time of trade disclosures are required to be made at or prior to the time of the trade and can be made either verbally or in writing.

Which of the following choices has the lowest priority of claims in a bankruptcy? A Secured creditors B Unsecured creditors C Preferred stock D Common stock

D Common stock In the event a corporation goes bankrupt and it must liquidate its assets, secured bondholders or creditors would be paid first (secured bonds are backed by specific tangible assets), then owners of debentures (unsecured bonds backed by the full faith and credit of the issuing corporation). Bondholders are paid first, as they are considered creditors. Stockholders are paid next, with preferred stockholders being third in this order of priority and common stockholders paid last.

The U.S. government does NOT guarantee the payment of interest and principal for which of the following securities? A GNMA (Ginnie Mae) securities B Treasury notes C Treasury Receipts D FHLMC (Freddie Mac) securities

D FHLMC (Freddie Mac) securities

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? A It provides loans to educational institutions B It issues securities that are not backed by the U.S. government C It purchases federally sponsored student loans D It issues securities that can be redeemed to pay for college education

D It issues securities that can be redeemed to pay for college education The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.

The Municipal Securities Rulemaking Board (MSRB) does NOT regulate which of the following? A Municipal dealers B Municipal salespersons C Municipal advertising D Municipal issuers

D Municipal issuers

The purchase price of a no-load fund is determined by the: A Net asset value plus a commission B Net asset value plus a sales charge C Supply and demand for the fund D Net asset value

D Net asset value A no-load fund has no sales charge and the purchase price is equal to the fund's net asset value.

A Municipal Securities Representative is NOT permitted to: A Sell municipal securities B Trade municipal securities C Assist in the underwriting of municipal securities D Supervise other Municipal Securities Representatives

D Supervise other Municipal Securities Representatives A Municipal Securities Representative may engage in all of the activities listed with the exception of supervising other representatives. Supervision can only be performed by a Municipal Securities Principal.

A customer requests that a broker-dealer sell stock that she owns and, at the same time, use the proceeds of the sale to purchase a different stock. For this transaction: A The broker-dealer is only permitted to charge a markup on the sale B The broker-dealer is required to charge a markup on each transaction separately C The broker-dealer is prohibited from charging a markup under these circumstances D The broker-dealer is permitted to charge a markup on both transactions, but is required to compute the markup based on the amount of money involved in the sale to the customer

D The broker-dealer is permitted to charge a markup on both transactions, but is required to compute the markup based on the amount of money involved in the sale to the customer When a customer directs her broker-dealer to use the proceeds generated by the sale of one stock and, at the same time, purchase another stock, the transaction is referred to as a proceeds transaction. When the broker-dealer determines the markup it will charge, industry rules state that the firm may charge a markup or commission on both transactions, but should compute the markup based solely on the amount of money involved in the sale to the customer. The regulatory focus is to be certain that the total amount received for executing a proceeds transaction does not violate the 5% Markup Policy. (88265)

Who has the responsibility to investigate the accuracy of the information in a prospectus for a DPP? A The IRS B FINRA C The SEC D The managing underwriter

D The managing underwriter The SEC reviews only the information in a prospectus. It never attests to its accuracy. The managing underwriter is responsible for investigating the accuracy of the information.

Investors may receive disclosure and secondary market information concerning municipal securities: A From the OATS system B Directly from the issuer C Through the TRACE system D Through the EMMA system

D Through the EMMA system The MSRB has established the Electronic Municipal Market Access (EMMA) system as the primary market disclosure service for official statements, other related primary market documents, and information. The EMMA system also contains information related to the continuing disclosure requirements submitted by municipal issuers and secondary market transactions submitted by municipal securities dealers. EMMA receives transactional information from the MSRB's Real-Time Transaction Reporting System (RTRS).

A corporation may choose to pay its shareholders with cash dividends or stock dividends. Which of the following statements concerning the tax status of these events is the most accurate? A Neither form of dividend is taxable. B Both forms of dividends are taxable. C While only the stock dividend is taxable when received, the receipt of cash dividends will require the investor to adjust in her cost basis per share. D While only the cash dividend is taxable when received, the receipt of stock dividends will require the investor to adjust her cost basis per share.

D While only the cash dividend is taxable when received, the receipt of stock dividends will require the investor to adjust her cost basis per share. Only cash dividends are taxable in the year in which they are received. The payment of a stock dividend increases the number of shares held by each shareholder. Since the stock's price will fall in the market, the IRS does not consider there to be a taxable event. However, shareholders are required to adjust their cost basis per share.

The third market is concerned with:

OTC - The third market is concerned with securities that are listed on an exchange (e.g., the NYSE or Nasdaq) that are traded in the OTC market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges.