chapter 1

a company currently has earnings for $4 and pays a .50 quarterly dividend. if the market price is 40, what is the current yield?

5%

an individual or firm that charges a fee for executing transactions on behalf of tis customers is called what? a-market maker b-dealer c-broker d-principal

c-broker a broker (agent,agency) is an individual or firm that charges a fee for executing transactions on behalf of its customers, as opposed to holding an inventory of the security and trading into and out of its own inventory (principal) LO 1f

derivative

a broad class of investments built on a two party contract that derives its value from a relationship to another investment or commodity

all or none

a type of best efforts underwriting where the issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all of the shares or cancel the underwriting.

mini max

a type of best efforts underwriting where there is a floor minimum (minimum number of shares that can be sold) and a ceiling maximum on the dollar amount of securities the issuer is willing to sell. the issuer must locate enough interested buyers to support the floor but not exceed the ceiling.

which of the following bond prices would fluctuate the most if interest rates fell a-20 year mortgage bond with a duration of 16 b-15 year unsecured bond with a duration of 12 c-30 year corporate bond with a duration of 14 d-10 year zero coupon with a duration of 10

a-20 year mortgage bond with a duration of 16 generally speaking the rule of thumb is that bonds with long term maturities will have higher fluctuations in price than short term maturities, given the same move in interest rates. what we need to pay attention to here is not the original maturity of the bond, but how much time is left. the truest measure of sensitivity (volatility) is the bonds duration and the greater the duration, the greater the fluctuation in price when interest rates move. LO 1a

which of the following statements is NOT true a-before filing the registration statement the SEC will set up a cooling period to ensure all registration requirements have been fully met b-the front of every prospectus must contain the sec disclaimer c-the preliminary prospectus may be used to gather indications of interest d-the securities act of 1933 required issuers of new nonexempt securities to file registration statements with the SEC

a-before the filing of the registration statement, the SEC will set up a cooling off period to ensure all registration requirements have been fully met the cooling off period begins after the s-1 registration has been filed, not before LO 1c

your customer feels overburdened with taxes and would like tax relief. after you discuss the abc municipal bond fund with her and advise her of the tax treatment of the distributions, which of the following statements would be the CORRECT advice? a-dividends are federally tax exempt, but capital gains are subject to taxation b-dividends and capital gains are federally tax exempt, but only the dividends may qualify for state exemption c-dividends and capital gains are federally tax exempt and may even be state exempt if issues in the portfolio are issues in her state of residence d-both dividends and capital gains are taxable at favorable capital gains rates

a-dividends are federally tax exempt, but capital gains are subject to taxation dividends from mutual bond funds are tax exempt because they represent tax exempt interest paid to the portfolio; capital gains distributions are taxable LO 1a

when seeking to transfer a previous customers account to a new BD, which of the following is NOT required a-educational material to the firm b-a signed TIF from the customer c-disclosure that assets may not be directly transferable d-disclosure of the differences in services between current firm and recruiting firm

a-educational material to the firm

your 45 year old client is interested in obtaining the highest current income possible from his investment. he is willing to accept fluctuations in investment principal. which of the following would best suit this clients investment objective a-high yield bonds b-aggressive growth stocks c-tax free money market securities d-a balanced portfolio of stocks and bonds

a-high yield bonds a high yield bond has, as the name suggests, a relatively high yield. it produces a higher yield by investing in a lower credit quality of bonds. aggressive growth stocks generally have very low dividends. tax free securities and balanced portfolios tend to have modest dividends as well LO 1a

the securities and exchange commission (SEC) regulates all of the following except a-intrastate securities offerings b-investment advisor and client relationships c-initial public stock offerings d-the secondary market

a-intrastate securities offerings the SEC was created by the securities exchange act of 1934 as a federal commission with the power to enforce the securities act of 1933 and all other subsequent federal securities acts. if a security is offered in only one state however, it does not need to register with the SEC. rather, according to rule 147, it must register in the one state (intrastate) where it is offered LO 1e

under the conduct rules, all of the following actions violate fair and ethical treatment of customers EXCEPT a-recommending that a customer set up a scheduled investment program, depositing the same amount each period regardless of market value b-encouraging customers to purchase mutual funds shares just before the ex-date to ensure that the customer receives the upcoming dividend c-assuring a customer, that because dollar cost averaging is one of the most effective means of investing for the long term, his account is unlikely to suffer any losses d-recommending that a customer regularly move his assets among several fund families with similar investment objectives to ensure diversification and top performance

a-recommending that a customer set up a scheduled investment program, depositing the same amount each period regardless of the market value encouraging a customer to invest according to a schedule is perfectly lawful LO 1g

all of the following must be disclosed in a mutual fund communication containing performance data EXCEPT a-the SEC disclaimer stating that the securities have not been approved or disapproved by the SEC b-data represents past performance c-the fact that investment returns fluctuate d-that investors who redeem shares may receive more or less than the original cost

a-the SEC disclaimer is not required in public communication. the no approval clause must be included in the prospectus LO 1d

seacoast securities acts as an over the counter market maker for odiferous tobacco stock, an exchange listed security. in which of the following markets is seacoast securities dealing

a-the fourth market b-the primary market c-the third market d-the auction market when an OTC market maker makes a market in a listed security they are acting in the third market. the fourth market is primarily for institutional trading. exchanges and the OTC market are part of the secondary market. exchanges are sometimes referred to as the auction market. LO 1f

a 27 year old client is in a low tax bracket and wants an aggressive long term growth investment. if her representative recommends a high rated municipal bond fund, the representative has a-violated the requirements of FINRA b-recommended a suitable investment because mutual bond funds are good long term investments c-committed no violation because municipal bond funds weather the ups and downs of the market well d-committed no violation if the customer agrees to the transaction

a-the investor is young and seeking growth (capital appreciation). municipal bonds have a steady income, but little or no growth. also the customer is in a low tax bracket and will not benefit from the tax free (but lower) returns found in municipal debt.

best efforts underwriting

acting as an agent, not a principal. underwriters are not committed to buy the shares and are not at risk all or none mini max

current or dividend yield

annual income (in dollars) / current market value =

current yield

annual income / current market value

your customer purchased 100 shares on jims burger shake corporation for 450 a share. the stock pays 22.50 in dividends annually. after the year the stock is trading at 495 a share. what is the total return for the holding period a-30% b-15% c-25% d-7.5%

b-15% the formula for calculating capital gains is income received plus gains (or minus losses) divided by the cost basis = total return. in this example (22.4+45)/450=15% LO 1b

john purchased 500 shares of the amazing pizza parlor stock for 45 a share. he later sold the stocks for 44 dollars a share after receiving 2 in taxable dividends from the stock. john has realized a-a 1 dollar capital gain b-a 1 dollar capital loss c-a 3 dollar capital gain d-a 3 dollar capital loss

b-a 1 dollar capital loss john realized a 1 capital loss. the formula sales proceeds - cost basis gives a result of -1 dollar. dividends are not used in this calculation

a broker dealer that maintains an inventory in CDO stock sells to a customer from that inventory at the ask price. the broker dealer is acting as a-an agent b-a market maker c-a broker d-a selling group member

b-a market maker this is also acting on a principal basis or acting as a dealer. when acting as an agent (broker) the broker dealer is not selling from their inventory. as the broker dealer maintains an inventory it is not an acting member of a selling group

which of the following choices would be a suitable recommendation for an investor who likes to receive a fixed income but also would like to take advantage of capital appreciation if the company's common stock rises a-cumulative preferred b-convertible preferred c-adjustable rate preferred d-participating preferred

b-convertible preferred

julie sold 100 shares of def corporation for 75 dollars a share and later bought them back for 70. what was julies gain or loss for this transaction a-loss of 500 b-gain of 500 c-loss of 1000 d-loss of 700

b-gain of 500 julie received 7500 when she sold the shares and paid 7000 to close the short position; a profit of 500 LO 1b

according to the conduct rules, a FINRA member firm may give certain selling concessions to which of the following a-high net worth institutions b-other member firms c-nonmembers d-the general public

b-other member firms members may give other members selling concessions, but sales to the public and to nonmember firms must be made at the public offering price LO 1g

the conduct rules prohibit all of the following practices EXCEPT a-failing to state a material fact in making a mutual fund recommendation to a customer b-presenting third party research reports to clients with disclosure that they were prepared by others c-borrowing from a customers account without the customers knowledge but with the intent of paying the loan back in a timely fashion d-encouraging an investor to purchase a mutual fund share just before the ex date

b-presenting third party research reports to clients with disclosure that they were prepared by others

volatility

bonds sensitivity to the direction of interest rates the more a bond moves in response to a change in interest rates, the more volatile. the less a bond moves the less volatile

your customer purchased 100 shares of jims burger shack inc. at 72 a share. after holding the shares for two months and collecting .50 in cash dividends they sell the shares for 71.50. what is their capital gain or loss a-breakeven, no loss or gain b-100 gain c-50 loss d-50 gain

c-50 loss cash dividends are not part of the capital gains/loss calculation. to determine the result of the trade subtract the cost basis (72) from the sales proceeds (71.50). this was a 50 cent per share loss, which you can then multiply by the number of shares to get a $50 loss. LO 1b

during the cooling off period of a new securities registration a registered representative would be allowed to a-send prospects to a preliminary prospectus with notations attached to call attention to areas of interest to the investor b-send prospects sales literature relating to the issue c-accept nonbinding indications of interest. d-take a check for a proposed purchase, provided the check is postdated after the effected date

c-accept nonbinding indications of interest

sales of tier 2 securities under regulation A require the distribution of a-an official statement b-a prospectus c-an offering circular d-a form s-1

c-an offering circular regulation a requires the use of an offering circular LO 1d

if a preferred stock pays a stated dividend of 6% and the issuer calls the stock, which if the following is NOT related to the call a-interest rates are probably lower than when the stock was issued b-the investor will likely be paid at least the par value c-dividends scheduled to be paid after the call date are not paid d-if a preferred stock is going to be called it must happen on or after the first available call date

c-dividends scheduled to be paid after the call date are not paid callable preferred stocks and callable bonds may be called in by the issuer anytime on or after the call date. on the call date the investor will receive the par value plus any declared dividends, but no dividends after that. calls generally happen when rates have declined. when rates fall, expect a call LO 1a

which of the following is NOT true regarding regulation A tier 1 offerings a-general solicitations are allowed b-offering must not exceed 20 million c-investors must be qualified investors d-the general public may invest

c-investors must be qualified investors investors in a tier 1 regulation a offering are not required to meet any specific qualifications LO 1e

which of the following statements regarding the securities exchange act of 1934 is not true a-it provides for regulation for the over the counter market b-it requires registration of broker dealers with the SEC c-it requires registration of securities d-it prohibits unequitable and unfair trade practices

c-it requires registration of securities to prevent manipulative and deceptive practices in the secondary market the act of 1934 (the people act) requires registration of people and exchanges transacting securities business LO 1f

all of the following are exempt securities except a-t bills b-bankers acceptances c-municipal bond funds d-commercial paper

c-municipal bond funds while municipal bonds are an exempt security, bond funds are not; they are investment company securities, which must be registered with the SEC before public sale LO 1e

which of the following is NOT money market instrument a-municipal construction loan note b-federal farm credit bank note maturing in one year c-newly issued treasury notes issued to meet a specific government funding requirement d-commercial paper issued by a finance corporation of a major automobile manufacturer

c-newly issued treasury notes issued to meet a specific government funding requirement a newly issued treasury note would have a maturity of at least 2 years and would not be considered a money market instrument LO 1a

what happens to outstanding fixed income securities when market interest rates drop a-yields increase b-short term fixed income securities are affected most c-prices increase d-coupon rates increase

c-prices increase when interest rates drop, the price of outstanding bonds rises to adjust to the lower yields on bonds of comparable quality LO 1a

when investors buy options, which of the following is NOT true? a-buying the call gives the investor the right to buy the stock b-buying a put gives the investor a right to sell the stock c-the buyer of a call has unlimited loss potential d-the maximum amount the buyer of a put can lose is the premium she paid for the contract

c-the buyer of a call has unlimited loss potential the buyer of an option has only the premium she paid at risk. this is true for both calls and puts. if the stock price moves against them, they simply do nothing and allow the worthless option to expire.

506b

can sell to up to 35 non accredited investors but no advertising

preliminary prospectus (red herring)

carries a legend showing the registration statement has been filed with the SEC, can be used as a prospecting tool, allowing issuers and underwriters to gauge investor interest and gather indications of interes

your customer purchased 250 shares of seabird airlines at 32 a share. seabird pays a .40 dividend. what is the dividend yield for seabird stock? a-2.5% b-10% c-1.25% d-5%

d-5% remember that unless otherwise stated, dividends from common stock are paid quarterly. dividend yield (current yield) is an annual figure. .40 x4=1.60. 1.60/32=0.05 or 5%. the formula is (quarterly dividend x 4) / current market value lo 1b

TCB wants to offer 80 million worth of common stock in its home state and in three other states. to clear the offer for sale TCB must file a-an offering circular b-a preliminary prospectus c-a letter of notification d-a registration statement

d-a registration statement TCB must file a standard registration statement because it is a nonexempt issuer selling securities interstate LO 1e

a customer asks not to receive confirmations of the trades he makes. the registered representative should a-tell the customer to put the request in writing so the firm can process it b-agree, but only with principal approval and for trades less than 5000 c-keep all confirmations in the customer file just in case they are needed for future reference. d-explain that FINRA rules dont allow for that

d-explain that finra rules dont allow for that a trade confirmation is a document that confirms a trade, its settlement date, and the amount of money due from or owed to the customer. for each transaction, the customer must be sent or given a written confirmation of the trade at or before the completion of the transaction (settlement date). with proper documentation, confirmations can be sent to another party but someone must receive them LO 1g

which of the following activities is NOT an unethical trade practice a-painting the tape b-spreading false rumors c-marking the close d-interpositioning

d-interpositioning interpositioning is an accepted practice as long as customers are not harmed by the action. all the others are forms of market manipulation and are unethical prohibited activities. LO 1g

regulation a was passed as part of which of the following laws a-tax cuts and jobs act of 2017 (TCJA) b-american recovery and reinvestment act (ARRA) of 2009 c-economic growth and tax relief reconciliation act (EGTRRA) of 2001 d-jumpstart our business startups (JOBS) act of 2012

d-jumpstart our business startups (JOBS) act of 2012 regulation a was part of the securities act of 1933. regulation a was updated by the jobs act in 2012 and became regulation a. of the different legislative acts listed here, the jobs act is the only one that we expect to appear on the exam LO 1e

your customer jonah, buys 200 shares of parker pictures inc on tuesday june 12th in a cash account. what is the last day for jonah to pay for the trade and meet the regulation t requirement a-tuesday june 12 b-thursday june 14 c-saturday june 16 d-monday june 18

d-monday june 18th. pay attention to the question, its a cash account not a cash trade. the regulation t requirement is t+4 on a regular way stock trade. a cash account means the trade was not made on margin; it does not mean the trade was for cash settlement. regular way settlement on this trade would be t+2 or thursday june 14. add two business days and the regulation t required payment date is monday june 18th

if a broker dealer requests an extension for settlement of a trade, to which of the following will the request be made a-the chief compliance officer b-the securities exchange commission (SEC) c-a firm principal d-the designated examining authority (DEA)

d-the designated examining authority (DEA) a request for an extension is made to the DEA. the DEA for an exchange trade is the exchange where the trade took place. the DEA for OTC trades is FINRA LO 1g

a preliminary prospectus will include all of the information found in the final prospectus EXCEPT a-the release date and the companys financials b-the next fiscal years earnings and the final price c-the use of funds and the release date d-the final price and the release date

d-the final price and the release date the final price is not in the preliminary prospectus, though an estimated range may appear. the SEC sets the release date, and as such, is not in the red herring. the use of funds and the company's financials do appear, but next years earnings do not because they are happening in the future. LO 1d

an investor desiring safety of principal, modest returns, and having a 5 year investment horizon should choose which of the following a-treasury bills b-a 10 year municipal bond rated AA c-a money market fund d-treasury notes

d-treasury notes treasury notes best suit the investors objective of safety and expectation of modern returns. they have 2-10 year maturities suitable to the investors investment time horizon as well. LO 1a

marking the close

effecting trades or falsely reporting trades to influence the closing price of a stock

third market

exchange listed securities trading in the otc market

securities act of 1933

federal legislation requiring the full and fair disclosure of all material information about the issuance of new securities

securities act of 1934

federal legislation that established the securities and exchange commission and aims to protect investors by regulating the exchanges, over the counter market, extension of credit by the federal reserve board, broker dealers, insider transactions, trading activities, client accounts and net capital

the ABC corporation would like to raise capital via regulation d private placement. to qualify for an exemption from registering with the SEC under rule 506, which of the following is TRUE i-advertising is allowed if only accredited investors may purchase the securities ii-advertising is not allowed if selling to a minimum of 35 nonaccredited investors iii-if selling to a minimum of 35 accredited investors, general solicitation is allowed iv-if selling to nonaccredited investors, general solicitation is not allowed

i-advertising is allowed if only accredited investors may purchase the securities iv-if selling to nonaccredited investors, general solicitation is not allowed if the private placement sells to any nonaccredited investors (with the maximum number being 35) no advertising or general solicitation is allowed. if the sale is exclusively to accredited investors, the private placement may advertise. LO 1e

which of the following describe how prices are arrived at in the securities market i-by auction in the exchanges ii-by auction in the OTC markets iii-by negotiation in the OTC markets iv-by negotiation in the exchanges

i-by auction in the exchanges iii-by negotiation in the OTC markets prices are set by open outcry, known as double auction in the exchanges, because the traders are physically present and can bid against each other. in the otc market, where there is no central trading location, prices have to be arrived at by one on one negotiation LO 1f

which of the following are characteristics of negotiable jumbo CDs i-issued in amounts of 100,000 to 1 million or more ii-always FDIC insured to face value iii-always mature in one to two years iv-trade in the secondary market

i-issued in amounts of 100,000 to 1 million or more iv-trade in the secondary market negotiable jumbo CDs are issued for 100,000 to 1 million or more and trade in the secondary market. most jumbo CDs are issued with maturities of less than a year. the FDIC insures only up to 250,000 LO 1a

which of the following statements regarding the differences between rule 506b and rule 506c of regulation d of the securities act of 1933 are true i-rule 506c c offerings can be advertised, while rule 506b offerings cannot ii-rule 506c offerings are limited to 25 nonaccredited investors, while rule 506b offerings do not have a limit iii-the bad actor provisions only apply to rule 506c offerings iv-rule 506c offerings are limited exclusively to accredited investors, while nonaccredited investors can participate in rule 506b offerings

i-rule 506c offerings can be advertised, while rule 506b offerings cannot iv-rule 506c offerings are limited exclusively to accredited investors, while nonaccredited investors can participate in rule 506b offerings as long as the offering is limited exclusively to accredited investors, rule 506c offerings may be publicly advertised. rule 506b offerings can never be advertised. the limit of 35 nonaccredited investors applies to rule 506b. there is no limit to the number of accredited investors for either rule. this is an example of a question that draws on your knowledge from the sie. there are few such questions on the series 6 but they do exist LO 1e

providing which of the following disclosure documents would be considered sufficient before soliciting or entering a sale of a mutual fund? i-statutory prospectus ii-statement of additional information iii-summary prospectus iv-rule 482 prospectus

i-statutory prospectus iii-summary prospectus either a statutory or a summary prospectus meets the disclosure requirement. neither an SAI nor an omitting (rule 482) prospectus are sufficient LO 1d

which of the following statements regarding transactions in the different securities markets is TRUE? i-transactions in listed securities occur mainly in the OTC market ii-transactions in unlisted securities occur in the OTC market iii-transactions in listed securities that occur in the OTC market are said to take place in the fourth market iv-transactions in listed securities that occur directly between institutions without the use of broker dealers as intermediaries are said to take place in the fourth market

ii-transactions in unlisted securities occur in the OTC market iv-transactions in listed securities that occur directly between institutions without the use of broker dealers as intermediaries are said to take place in the fourth market listed securities traded on exchanges constitute the exchange market. unlisted securities traded over the counter (OTC) make up the OTC market. listed securities traded OTC compose the third market. Securities traded directly between institutions constitute the fourth market. LO 1f

total return

income received + gains (or - losses) / cost basis

what is an s-1

initial registration form for new securities required by the SEC for public companies that are based in the U.S.

fourth market

institutional investors where large blocks of stock listed and unlisted are traded in privately negotiated unassisted transactions with electronic communication networks

firm commitment

investment banker acting as a principal underwriters buy the shares from the issuer and resell the securities to the public at a higher price-the pop-and earns the price differential (spread) for its efforts it is the underwriters who are at risk for the shares they cant sell to the public, not the issuer

final prospectus

must precede or accompany all sales confirmations. prospectus must include a description of the offering, the offering price, the selling discounts, the offering date, the use of proceeds, the description of the underwriting (but not actual contract), statement of the possibility that issues price may be stabilized, history of business, risks to purchasers, description of management, material financial information, legal opinion concerning the formation of corporation, sec disclaimer

rule 147

offer stock in one state, may not be sold to non residents within 6 months (intra state offering)

regulation a

offering circular, small and medium sized tier 1=max 20 mil tier 2=max 75 mil

painting the tape

one one party sells stock to another with the understanding that the stock will be repurchased later in the day at virtually the same price. the intent of these transactions is to make it appear that far more activity in a stock exists than actually does

regulation d

private placement, legend stock, unlimited capital raised

506c

regulation d-can sell only to accredited investors

capital gains or losses

sales proceeds-adjusted cost basis

capital gains/loss

sales proceeds-adjusted cost basis=

bankers acceptances

short term time draft with a specified payment date drawn off of a bank-essentially a postdated line of credit or check. payment is between 1 and 270 days. issued at a discount to face value, normally used to finance international trade

interpositioning

the act of adding another broker dealer to a transaction when there is no benefit to the buyer or seller. happens when one broker dealer inserts another into their own transactions simply to generate commissions or fees for the other broker dealer

otc market

unlisted securities

duration

way of measuring a bonds volatility that combines maturity and the coupon rate higher duration means more volatile price, lower duration brings less price volatility