Exam #4

In a proxy contest, which of the following must register with the Securities and Exchange Commission? I. All shareholders who have been approached by solicitors II. All persons who have been approached in proxy solicitation III. The upper management of the corporation who are also shareholders IV. All persons providing shareholders with unsolicited advice A. II and III B. II and IV C. I and IV D. I and III

B. (All those participating in the solicitation of proxies, whether directly to obtain proxies themselves, or to provide unsolicited advice to shareholders regarding how to vote must register with the SEC.)

An equity option call buyer has the right to A. purchase stock and is bearish B. purchase stock and is bullish C. sell the stock and is bullish D. sell the stock and is bearish

B. (Call buyers pay the premium for the right to purchase the stock at the strike price. Those who buy stock are bullish (anticipate that it will rise).)

In order for a registered representative of a member firm to receive any form of compensation, such as commissions, after terminating employment, all of the following statements are correct EXCEPT A. it would be permissible to pay continuing commissions to a surviving spouse B. earnings from referred business from existing clients would be eligible for payment C. the agreement must be entered into before the termination of employment D. there must be a contract in effect calling for these continuing commissions

B. (Continuing commissions are permitted, but there is no requirement that they be offered. In order for a former registered representative to receive them, the terms must be spelled out in a contract entered into before termination. The contract may call for payment to heirs but cannot provide any compensation for business referred or introduced by an employee after that person ceases to be registered with the member.)

Which of the following may receive a commission from a FINRA member firm? A. a domestic nonmember firm that agrees to abide by FINRA rules B. A foreign nonmember firm that agrees to abide by FINRA rules C. A retired representative, provided that are no adverse judgments against the RR D. a suspended firm, if the transaction is not related to their suspension violation

B. (Domestically, nonmember firms, suspended firms, and retired representatives are not licensed or registered and may not receive commissions. The exception is a foreign nonmember firm that agrees to abide by FINRA rules, regulations, and standards.)

An investor asks for a copy of mutual funds Statement of Additional Information (SAI). The request must be satisfied within

3 business days, free of charge

Which of the following bonds trade flat (without interest) unless interest payments are declared by the board of directors (BOD)? A. Income bonds B. Mortgage bonds C. Debentures D. Callable bonds

A. (Bonds that trade flat (without interest), unless the payments are declared by the BOD, are income bonds (also known as adjustment bonds).)

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. 25 shares B. 100 shares C. 125 shares D. 250 shares

A. (Stock rights (also known as preemptive rights or subscription rights) give current shareholders the ability to preemptively purchase enough shares to maintain their proportionate ownership of the corporation. This prevents their dividend and voting power from being diluted. 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.)

Which of the following statements regarding systematic risk as it relates to an investment portfolio is TRUE? A. Diversification will not eliminate it B. Diversification can be used to eliminate it completely C. Diversification ensures that portfolios are not subject to it D. Diversification cannot mitigate it to any extent

A. (Systematic risk is the risk that changes in the overall economy will have an adverse effect on individual securities, regardless of the company's circumstances. Understanding what it is, is to know that no amount of diversification will eliminate it completely. While one might be able to mitigate it somewhat, one cannot diversify away systematic risk.)

A Federal Reserve member bank's deposits in excess of the amount required to be on reserve are known as A. federal funds B. jumbo funds C. promissory funds D. prime funds

A. (The Federal Reserve Bank (FRB) mandates how much money its member banks must keep on reserve at the FRAny deposits in excess of the required amount are known as federal funds.)

An investor has purchased a bond with a 5% coupon. This investor will receive A. $50 annual interest until maturity B. $5 annual interest until maturity C. $50 semiannual interest payments D. $50 interest payable at maturity

A. (The coupon represents the annual rate of interest payable. A bond with a 5% coupon will pay $50 interest annually (5% × $1,000 par value = $50).)

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. $40 per share C. $16 per share D. $10 per share

A. (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).)

Which of the following orders can be used to close a short position in CDT stock that consists of 1,000 shares? A. Buy 1000 shares of CDT B. Buy 10 CDT call options C. Write 10 CDT call options D. Sell 1000 shares of CDT

A. (To close a short position consisting of 1,000 shares of CDT stock, one would need to purchase 1,000 shares—buy 1,000 shares of CDT. Buying the call options would not close the position, but once owned, they could be exercised with the purchased shares then used to close the short position.)

Freeriding

Buying and immediately selling securities with- out making payment. This practice violates the SEC's Regulation T.

Fully disclosed broker-dealer

Clears all of its retail customer transactions and those of other BDs (A fully disclosed broker-dealer is also known as an introducing BD because it introduces its business to a carrying firm that can clear and process transactions for it. Unable to clear transactions themselves, they are not a clearing agent or carrying firm and therefore cannot take custody of funds and securities.)

The firm element of a broker-dealer's continuing education requirement must be undergone by all registered persons who A. have purely clerical duties with the firm B. have disciplinary actins pending C. have not had such training in the past 6 months D. have direct contact with the public

D. (A broker-dealer's continuing education program has a regulatory element and a firm element. The contents of the firm element are determined by the broker-dealer and must be met annually by all registered persons who have direct contact with the public.)

Class C Shares

Shares of mutual fund that have an up-front sales charge, usually 1%, plus an annual 12b-1 fee, or level load, that is usually equal to 1% of the fund's assets. Sometimes there is also a Contingent Deferred Sales Charge if the shares are sold in less than 12 to 18 months

prospectus

The Securities and Exchange Commission (SEC) requires full and fair disclosure of all material information and facts regarding the issuance of securities. This disclosure is done via a prospectus, which is required to provide investors enough information to make fully informed buying decisions.

Municipal revenue bonds are

not subject to debt limits and do not require voter approval (Municipal revenue bond issues are self-supporting. Given that they do not rely on taxes to support the debt service, they do not require voter approval. Nor are they subject to statutory debt limits as GO bonds are.)

Regarding the purchase of a new equity issue, an account where a restricted person has a beneficial interest would be allowed to purchase the new shares at the public offering price

only if the interest does not exceed 10% (Regarding the purchase of a new equity issue, an account where a restricted person has a beneficial interest would be allowed to purchase the new shares at the public offering price)

If a broker-dealer firm wishes to become a FINRA member firm, it must make its application

to the FINRA district office where the applying firm has its home office (An application to become a FINRA member firm must be made to the FINRA district office in the district where the applying firm has its home office.)

Broker-dealers who transact securities business with other BDs or customers must be registered with A. SEC B. OCC C. FRB D. FINRA

A. (Any entity such as a broker-dealer intending to do business with other BDs or customers involving securities must be registered with the Securities and Exchange Commission (SEC).)

A surplus in the U.S. balance of payments can occur if I. interest rates in foreign countries are higher than US domestic rates II interest rates in foreign countries are lower than US domestic rates III. US consumers are purchasing (importing) foreign goods IV. foreign consumers are purchasing (importing) US goods

A. (Anything that brings money into our domestic economy leads to a surplus (more money coming in than going out). When interest rates abroad are comparatively lower, money flows into the United States to earn a better rate. When foreign consumers are purchasing more U.S. domestic goods and services, money flows into the United States as well.)

A 72-year-old customer has a $30,000 required minimum distribution (RMD) calculated to be taken from an IRA. If the customer is in the 20% income tax bracket and only withdraws $25,000 from the account, how much in taxes and penalties will be owed? A. $5000 B. $8500 C. $10,000 D. $12,500

B. (Failure to meet the required minimum distribution (RMD) results in a 50% penalty tax on the shortfall. In this case, taking only $25,000 when $30,000 should have been taken leaves $5,000 exposed to the 50% penalty tax. $5,000 × 50% equals $2,500. Note that the IRS will force the distribution of the RMD shortfall ($5,000). In addition to the penalty, the ordinary income tax on the amount withdrawn must also be paid (20% × $30,000 = $6,000). Total tax liability on this withdrawal equals $8,500 ($2,500 penalty tax plus $6,000 ordinary income tax).)

Regulation T, the initial margin requirement, is set by A. the comptroller of the currency B. the FRB C. the SEC D. the president and Congress

B. (Regulation T, the initial margin requirement currently at 50%, is set by the Federal Reserve Board (FRB).)

A customer believes the price of MJS stock will rise but is not currently in a position to purchase the stock outright. How could the customer use options to profit from a rise in the stock's price? I Buy calls II. Write calls III. Buy puts IV. Write puts A. I and III B. I and IV C. II and IV D. II and III

B. (The investor believes the stock's price will rise and therefore is bullish. Buying calls and writing puts are bullish strategies, while buying puts and writing calls are bearish strategies.)

At the time of dissolution, which of the following regarding a limited partnership is TRUE? A. limited and general partners are paid concurrently B. limited partners are paid before general partners C. limited and general partners are paid after the IRS D. limited partners are paid after general partners

B. (When a limited partnership (LP) is dissolved, limited partners are paid before general partners. Remember that with an LP, all tax consequences are passed on to the partners. Therefore, it is the individual partners who may incur a tax liability to be paid to the IRS, not the partnership entity.)

When interest rates are falling, which bonds are most likely to expose holders to call risk? A. All bonds, regrardless of the coupon rate B. callable bonds with higher coupons C. callable bonds with lower coupons D. all bonds, regardless of whether or not they are callable

B. (When interest rates fall, issuers will call in their callable debt issues with the highest coupon rates first. These are the ones currently costing the issuer the most in interest payments. Therefore, when interest rates are falling, holders of higher coupon bonds are more exposed to call risk than are those investors holding lower coupon bonds.)

A broker-dealer firm opening a corporate account must establish all of the following EXCEPT A. the names of those who will have access to or authority over the account B. location of any account records that corporation will keep when received C. the legal right of the corporation to open a brokerage account D. any limitations the corporation has placed on account activites

B. (Where the corporation keeps its records is of no concern to the broker-dealer. The broker-dealer will keep its own records on the account, in any event. All the other information noted must be ascertained before the account may be opened.)

A bank issues and guarantees certificates of deposit, and those that are negotiable are considered money market instruments. What makes a CD negotiable? A. Backing by the bank's good faith and credit B. Secondary market trading C. A fixed interest rate D. Short-term maturity

B. (While all of these are characteristics of negotiable certificates of deposit issued by banks, it is the ability to trade the CDs in the secondary market that makes them negotiable.)

All of the following are benefits of using a prime broker EXCEPT A. cost savings B. multiple executing brokers C. research D. consolidation of records

C. (An institutional investor may select one firm (the prime broker) to provide custody and financing of securities while other firms, called executing brokers, handle all trades placed by the customer. It is not unusual for large companies to use dozens of executing broker-dealers. Trade confirmations from the many executing broker-dealers are consolidated and are provided along with account statements by the prime broker. Prime brokerage is efficient and saves the customer time and money. Research is not associated with prime brokerage accounts.)

An application for FINRA membership carries the applying firm's specific agreement to do which of the following? A. Pay a fixed yearly sum to the SEC B. Provide FINRA with periodic financial reports C. Comply with the associations rules and regs D. Attend FINRA's annual regulatory conference

C. (Application for FINRA membership carries the applying firm's specific agreement to comply with the association's rules and regulations, comply with federal securities law, and pay dues and assessments to FINRA.)

Regarding exchange-traded funds (ETFs), as compared to open-end (mutual) funds, which of the following are TRUE? I. ETF transactions are subject to commissions II. Expenses for ETFs tend to be very high compared to mutual funds III. EFTs may trade at a price that is less than the NAV per share IV. ETFs cannot be purchased on margin while mutual funds can be. A. II and IV B. II and III C. I and III D. I and IV

C. (Because ETFs usually track an index, the operating expense ratios are generally lower than that of open-end companies. But that advantage can be canceled out by the commission charges when purchasing and selling an ETF. An open-end investment company must redeem shares at the NAV per share; with ETFs, pricing is based on supply and demand, making it possible to receive less than NAV. One cannot purchase open-end shares on margin, but ETFs can be.)

The income level of a donor A. will affect contributions into a Section 529 plan B. may affect contributions into both Coverdell ESAs and Section 529 plans C. may affect contributions into a Coverdell ESA D. will not affect contributions into a Coverdell ESA or a section 529 plan

C. (Contributions into a Coverdell ESA are phased out at high income levels for a donor, whereas the income level of a donor has no impact on contributions made into a Section 529 plan.)

A broker-dealer has engaged in a reverse repurchase (repo) agreement. How was this done? A. An initial sales is followed by a purchase later, at a lower price B. An initial sale is followed by a purchase later, at a higher price C. An initial purchase is followed by a sale later, at a higher price D. An initial purchase is followed by a sale later, at a lower price

C. (In a reverse repurchase (repo) agreement a dealer agrees to buy securities from an investor and sell them back later at a higher price. In other words, the reverse of a repo agreement.)

Which of the following are considered intangible drilling costs for an oil and gas DPP? A. Fuel and interest expenses B. Wages and equipment C. Wages and insurance D. Equipment and fuel

C. (Intangible drilling costs (IDCs) are costs for those items that would have no salvage value at the end of the program. These might include wages, supplies (not equipment that can be depreciated), fuel, and insurance.)

When a corporation issues a mortgage bond, the issue's total value A. must equal the value of the real estate by which it is backed B. is unrelated to the value of the real estate because it is an unsecured debt instrument C. should be less than that of the real estate it is backed by D. should be greater than that of the real estate it is backed by

C. (Mortgage bond issues represent the amount the issuer is borrowing that is backed by its real estate assets. Just as with a home mortgage, the amount borrowed shouldn't exceed the value of the property. Hence, the issue's total value should be less than that of the real estate by which it is backed. Backed by real property, these are secured debt instruments.)

Which if the following may NOT be purchased on margin but can be used as collateral for a margin loan after being held for 30 days? A. Warrants B. Equities C. Mutual funds D. Options

C. (Neither mutual funds nor new issues can be purchased on margin. However, both may be used as collateral for a margin loan after being held for 30 days. Options are not marginable securities, but equities, bonds, and warrants are.)

When Options Clearing Corporation receives a notice to exercise, it will assign that notice to A. a long broker dealer B. the party long the contract C. a short BD D. the party short the contract

C. (The exercise and assignment process is as follows: A long customer notifies its broker-dealer (long broker-deal). The long broker-dealer notifies OCOCC then assigns the short broker-dealer, who will then in turn assign its short customer.)

An investor with no existing positions in MMS stock sells 100 shares. This is A. a long bearish position B. a long bullish position C. a short bearish position D. a short bullish position

C. (With no other existing positions, this sale transaction would have to be opening a position. Sell to open a position = short = bearish.)

An individual would most likely be statutorily disqualified from working in the securities industry for which of the following reasons? A. Conviction for misdemeanor assault B. Charged with DUI resulting in personal injury- felony C. Willful failure to disclose motor vehicle fines in excess of $1,000 D. Will failure to disclose person bankruptcy or unsatisfied liens

D. (A willful misstatement or omission made on an application for membership or registration as an associated person is deemed a serious infraction of securities law that would likely lead to a statutory disqualification from the securities industry. The Form U-4 does not ask about motor vehicle fines per se. Felonies convictions have to be disclosed, as do misdemeanor convictions involving money or securities.)

For which of the following investors would Class C shares be most suitable? A. An investor who intends to leave the money in the fund for many years B. A relatively inexperienced investor C. An investor interested in high-risk, high-potential return speculation D. An investor who intends to redeem the shares within a short time

D. (Because Class C shares have no sales charge levied at the time of purchase but rather levy a withdrawal from the customer's account every quarter, they would be most suitable for an investor intending to redeem the shares relatively soon. Mutual funds are not intended for the speculative investor, those who might trade in and out frequently, and no particular share class is especially suited to the inexperienced investor.)

For margin transactions taking place through introducing broker-dealers, those who do not clear their own transactions, extension requests are A. never permitted B. made by the introducing BD C. made by the customer D. made by the clearing firm

D. (Broker-dealers who are self-clearing will make their own extension requests. For those that are not self-clearing, known as introducing broker-dealers, the extension request must be made by the clearing firm.)

If a customer wishes to open a cash account in his name only and allow a third party to make trading decisions, but not withdraw cash and securities, he must instruct his broker-dealer to open a A. cash account with full power of attorney B. cash account C. margin account D. cash account with limited power of attorney

D. (For a person other than the account owner to withdraw assets and make trading decisions, full power of attorney is required. A limited power of attorney allows someone other than the account owner to enter trades, but not to withdraw assets.)

Which of the following pairs are NOT covered by the Federal Deposit Insurance Corporation (FDIC) at any level? A. CDs and self-directed IRAs B. Savings accounts and annuities C. CDs and mutual funds D. Mutual funds and annuities

D. (Investment products that are not deposits are not covered by the FDIC. This would include life insurance policies, mutual funds, annuities, and individual securities such as stocks and bonds. "At any level" means neither partially nor fully.)

An investor establishes the following position: Long 1 XYZ September 40 call at 2. Utilizing this position, the maximum potential gain for the investor is A. $38 per share B. $40 per share C. $42 per share D. unlimited

D. (Long calls are bullish positions. The investor wants to see the stock go up in price. The maximum gain on a long call is unlimited because, in theory, the underlying stock's price can go to infinity and is, therefore, also unlimited.)

Interest-rate sensitivity for preferred shareholders should be understood to mean that A. when interest rates rise, so do the prices of preferred shares B. when interest rates fall, so do the prices of preferred shares C. preferred share prices are not impacted by (insensitive to) changes in interest rates D. when interest rates rise, the prices for preferred shares can fall

D. (Preferred shares, like debt securities, are sensitive to and have an inverse relationship to interest rates. Rates up, prices down. Rates down, prices up.)

Each of the following is defined as an investment company EXCEPT A. An open-end management company B. a closed-end management company C. Fixed and non fixed unit investment trusts (UITs) D. Real estate investment trusts (REITs)

D. (Real estate investment trusts (REITs) are not investment companies such as UITs and management companies (both open and closed-end).)

Restricted securities may not be sold until they have been held fully paid for A. 2 years B. 1 month C. 1 year D. 6 months

D. (Restricted securities may not be sold until they have been held fully paid for a period of 6 months. This applies to both affiliates and nonaffiliates, but affiliates would be subject to volume restrictions.)

Rule 144 stipulates that after holding restricted stock fully paid for 6 months, an affiliate may begin selling shares A. at the discretion of the issuer's BOD B. subject to the volume restrictions on any single day C. completely unrestricted D. subject to volume restrictions within any 90 day period

D. (Rule 144 stipulates that after holding restricted stock fully paid for 6 months, an affiliate may begin selling shares but is subject to volume restrictions within any 90-day period.)

A corporation sells shares to the investing public in order to raise capital. This is known as A. an exchange market execution B. a secondary market transaction C. a primary, or investor to investor transaction D. an issuer transaction

D. (The primary market is where securities are sold to the investing public by the issuer wishing to raise capital. These are known as primary market or issuer transactions.)

All of the following would be considered advantages of exchange traded funds as opposed to mutual funds EXCEPT A. ETFs are marginable B. ETFs trade on exchanges C. ETFs are priced continuosly throughout the day D. ETFs are commissionable

D. (Trading on exchanges, ETFs are priced throughout the trading day making them easy to trade and liquid. They can also be bought or sold on margin. The purchase or sale of ETF shares is a commissionable transaction. However, the commissions paid can erode the low expense advantage of ETFs and this would have the greatest impact when trading in and out of ETF shares frequently, or when investing smaller sums of money.)

pump and dump scheme

When someone holding a stock artificially drives its share price up by floating exaggerated or false reports of its value through Web sites, online postings, or e-mail, this is known as

Preemptive rights are

designed to prevent dilution of a shareholder's ownership in the company.