Midterm Part 1 & 2: Unit 1 - Unit 15

Which of the following securities is most often used to fund international trade? A) Banker's acceptance (BAs) B) Real Estate Investment Trust (REIT) C) Federal funds D) Negotiable certificate of deposit

A) Banker's acceptance (BAs) BAs are widely used in international trade for payments that are due for a future shipment and delivery of goods. For example, a Brazilian shoe manufacturer would receive a BA from a U.S. retailer for a guaranteed future payment when the shoes arrive in the United States. The manufacturer may ship its product knowing that the BA is guaranteed by a commercial bank. BAs are negotiable and freely traded in the money markets at a discount.

A prospectus displays which of the following? A) Description of how the proceeds will be used B) Performance predictions for a minimum of three years C) The Securities and Exchange Commission (SEC) endorsement D) A guarantee insuring against loss

A) Description of how the proceeds will be used A prospectus will not contain performance predictions, may not imply endorsement of the SEC, nor will it contain guarantees of gains or guarantees against loss.

A broker-dealer has a line of business restricted solely to the purchase and sale of securities with trade executions being handled by another member firm. Which of the following would best describe this type of firm? A) Introducing/fully disclosed B) Market making C) Clearing/carrying D) Prime/executing

A) Introducing/fully disclosed A fully disclosed introducing broker-dealer is what the word implies—it introduces its customers to a clearing firm. Clearing firms (often referred to as carrying firms) hold their customer's funds and securities as well as those of their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office. Because the risk associated with holding customer funds and securities is not present, net capital requirements are much lower for introducing firms than they are for self-clearing or carrying broker-dealers.

Which of the following best describes a prospectus? A) It is a full and fair disclosure of all material information and facts regarding the issuance of securities. B) It is a useful but not mandatory document showing detailed information intended to offer investors adequate reason to purchase shares. C) It is a truth-in-lending document required whenever a loan is made to an issuer via the purchase of its debt securities. D) It is a document, required by securities law, which offers limited information about an issuer's securities to be offered to the public.

A) It is a full and fair disclosure of all material information and facts regarding the issuance of securities. 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.

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

A) Mutual funds and annuities 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.

Which of the following is an example of an equity security? A) Preferred shares B) Debentures C) Equipment trust certificates D) Mortgage bonds

A) Preferred shares Both common and preferred shares are equity securities. Each of the other choices represents a debt instrument.

The XYZ Company is looking to offer shares of its common stock to the public. Which of the following laws enacted by Congress would have the most relevance to the issuance of these securities? A) The Securities Act of 1933 B) The Investment Company Act of 1940 C) The Securities Investors Protection Act of 1970 D) The Trust Indenture Act of 1939

A) The Securities Act of 1933 The Securities Act of 1933, also known as the Paper Act or Prospectus Act, is the bedrock of all modern securities law. It requires issuers looking to make a public offering of securities to provide full and fair disclosure of all material facts about the company and the securities being offered. The company does this by registering its securities with the U.S. Securities and Exchange Commission (SEC), often with the aid of accountancy firms, securities attorneys, and underwriters. Part of the registration process for newly offered securities is the publishing of a prospectus which all prospective investors must receive at or prior to purchase.

Those industries that are least affected by normal business cycles are A) defensive industries. B) cyclical industries. C) growth industries. D) special situation.

A) defensive industries. Defensive industries are least affected by normal business cycles. Companies in defensive industries produce nondurable consumer goods, such as food, pharmaceuticals, and tobacco or supply essential services such as those supplied by utility companies. Public consumption of such goods remains fairly steady throughout the business cycle.

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) downward in price. B) only in accordance to supply and demand. C) upward in price. D) unaffected by the changing interest rates.

A) downward in price. 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.

At expiration CDT stock is trading at 43. A January 40 put would be A) left to expire unexercised. B) recognized as expiring in the money. C) noted as having 3 points of intrinsic value. D) expiring right at the money.

A) left to expire unexercised. At expiration if the strike price of a put (40) is below the current market value of the underlying stock (43), the put contract is out of the money, has no intrinsic value and therefore would expire without being exercised. Remember that owning the put gives the holder the right to exercise and sell the stock at the strike price of 40. One wouldn't want to sell a stock at 40 if it is currently trading at 43 in the open market.

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

A) made by the clearing firm. 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.

The maximum potential loss for an investor short a put option is A) strike price minus the premium received. B) strike price plus the premium received. C) the premium received. D) unlimited.

A) strike price minus the premium received. Short puts are bullish. In wanting the stock price to rise, one's risk is that the stock falls in price below the breakeven point. The maximum loss occurs if the stock falls to zero. Therefore, the maximum loss on a short put is equal to the breakeven (strike price minus premium for puts).

Money market securities can be associated with which of the following characteristics? A) Making interest payments at regular intervals B) Being highly liquid C) Long-term maturities D) High returns relative to the general debt market

B) Being highly liquid Money market securities have short-term maturities. With little time left to default, they are considered to be highly liquid and, therefore, relatively safe. Safety or less risk equates to lower returns. Typically issued at a discount and maturing at face value, they generally make no regular interest payments. The difference between the discounted purchase price and the face value received at maturity represents their return.

Which of the following would be least likely to directly impact a bonds yield? A) Time to maturity B) Number of bonds in the issue C) Current interest rates D) Issuer's credit quality

B) Number of bonds in the issue A bond's yield expresses the cash interest payments in relation to the bond's value. Yield is determined by the issuer's credit quality, prevailing interest rates, time to maturity, and any features the bond may have. The number of bonds in a single issue is generally determined by how much capital the issuer needs to borrow at the time of issue, while its yield is something that will fluctuate as the bond trades in the secondary market and gets closer to maturity.

Just as markets can be influenced by many factors, so can the market price of a single company's stock. While all of the following could impact a company's stock price to some extent, which would be the least likely to have a direct and immediate impact? A) Changes in the business cycle B) Political elections C) Federal Reserve Board (FRB) policies D) The company's earnings

B) Political elections The price of a company's stock will be impacted directly by the company's earnings and changes in the business cycle. Less directly impactful would be FRB policies to loosen or tighten credit, and least likely to have a direct impact would be the outcome of political elections. It should be noted, however, that the outcome of political elections can influence FRB policies over time and, therefore, where the economy stands in relation to the business cycle. Still, however, elections would have less of an immediate impact.

A customer of a Financial Industry Regulatory Authority (FINRA) member firm buys securities on margin. The customer is expected to pay a rate of interest on the margin loan based on which of the following? A) The federal funds rate B) The broker call loan rate C) The discount rate D) The prime rate

B) The broker call loan rate The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to lend to margin account customers. Margin accounts permit customers to purchase eligible securities without paying in full. Typically, an investor is required to deposit only 50% of the purchase price of eligible common stock with the balance being borrowed. The amount borrowed, as with any loan, is subject to interest payments.

Which of the following statements best describes financial risk? A) The risk that when interest rates decline, it is difficult to invest proceeds from redemptions B) The risk that an issuer will be unable to meet interest and principal payments on debt obligations C) A risk generally caused by poor management and operating decisions D) The risk that a security with a call feature might be called before maturity

B) The risk that an issuer will be unable to meet interest and principal payments on debt obligations Financial risk emanates from the use debt financing (leverage). It represents the potential inability to meet interest and principal payments on debt obligations, which can lead to bankruptcy. It is sometimes called credit risk or default risk.

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

B) Wages and insurance 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.

An investor purchases a bond in the secondary market at $950. Assuming $1,000 par value, this bond is trading at A) the market. B) a discount. C) a premium. D) par value.

B) a discount. When a bond is priced below par value, it is trading at a discount (discount to par).

Different categories of preferred shares offered by an issuer A) all must have the same fixed dividend rate. B) all have preference over the issuer's common shares. C) must all be callable shares. D) must all be convertible shares.

B) all have preference over the issuer's common shares. Separate categories of preferred shares may differ in several ways, including dividend rate and profit participation privileges. However, all maintain preference over common stock shares issued.

Two investors have engaged in the same put transaction: one, the buyer who is now long the put and the other, the seller who is now short the put. All of the following are true except: A) one investor's maximum loss potential is the other's maximum gain potential. B) both investors have a maximum loss potential that is limited to the premium paid. C) breakeven is the same number for both investors. D) maximum gain and loss potential for one investor are different than the others maximum gain and loss potential.

B) both investors have a maximum loss potential that is limited to the premium paid. All options are a two-party contract. One investor's maximum loss potential is the other's maximum gain potential. Therefore, for each of the parties, the maximum gain is different and the maximum loss is different. Only buyers have a maximum loss potential limited to the premium paid. And, finally, remember that the breakeven is always the same for both parties. The put buyer, who is bearish, wants the underlying stock price below the breakeven, while the put writer, who is bullish, wants the underlying stock price above the breakeven.

When investing in overseas markets in foreign securities, investors should be aware of and understand A) business risk. B) currency risk. C) market risk. D) reinvestment risk.

B) currency risk. Whenever investing in securities issued in non-U.S. markets, investors need to be sensitive to the different risks that might apply to foreign investments. Of those listed here, currency risk should be of concern. Currency risk is the possibility that an investment denominated in a foreign currency could decline for U.S. investors if the value of that currency declines in its exchange rate with the U.S. dollar.

A company has distributed profits to its shareholders. This type of distribution would most likely be in the form of A) warrants. B) dividends. C) bonds. D) options.

B) dividends. The distribution of profits to shareholders would generally be in the form of dividends to be received at the discretion of the board of directors (BOD). Bonds and warrants are other types of securities a company might issue, while options are a derivative product that would not be issued by the company.

An affiliate holding unregistered shares can sell under Rule 144 A) as often as wished. B) four times a year. C) one time a year. D) two times a year.

B) four times a year. Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year.

An investor is short 1 XYZ January 60 put at 2. This investor A) can exercise the contract to sell XYZ stock at $60 per share. B) has received $200 for writing the put contract. C) has the right to buy 60 shares of XYZ stock. D) can exercise the contract to sell XYZ stock at $2 per share.

B) has received $200 for writing the put contract. An investor who is short 1 January 60 put at 2 has received $200 premium to write (sell) the contract. Being short the put (sold), the investor will be obligated to buy 100 shares of XYZ stock at the strike price ($60) if the contract is exercised by the owner who would have the right to sell it. Remember that only the owner, the buyer, or the party who is long can exercise the contract and this imposes an obligation on the seller, the writer, or the party who is short the contract.

If the stock market were to fall substantially in a single day, a portfolio consisting primarily of common and preferred stock would be most subject to A) regulatory risk. B) market risk. C) reinvestment risk. D) inflation risk.

B) market risk. Market risk is the risk that when the overall market declines, so too will any portfolio made of securities the market is composed of.

A corporation enlists the services of a transfer agent, who would be expected to handle all of the following functions except A) maintaining records of shareholder ownership. B) registering the corporation's securities with the state. C) replacing lost or destroyed stock certificates. D) canceling old certificates and issuing new ones.

B) registering the corporation's securities with the state The transfer agent for a corporation is responsible for ensuring that its securities are issued in the correct owner's name; canceling old certificates and issuing new ones; maintaining records of ownership; and handling problems relating to lost, stolen, or destroyed certificates. It is the registrar—a separate entity—who is responsible for registering the corporation's securities with the state.

The maximum loss on a short call is A) strike - premium. B) unlimited. C) strike + premium. D) the premium.

B) unlimited. An investor holding a short call begins to lose money as the stock price exceeds the strike price of the option. Because there is no limit to how high a stock price can go, the potential loss on a short call is unlimited.

The business cycle includes all of the following classifications except A) expansion. B) waves. C) trough. D) peak

B) waves. Throughout modern history, periods of economic expansion have been followed by periods of contraction in a pattern referred to as the business cycle or economic cycle. Business cycles go through four stages; expansion, peak, contraction, and trough.

The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105½ is approximately A) 6.5%. B) 7.5%. C) 7.1%. D) 8.2%.

C) 7.1%. A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 ÷ $1,055 = 7.109%, or approximately 7.1%.

Which class of shares have a 12b-1 fee as the primary sales charge? A) No load B) Class B shares C) Class C shares D) Class A shares

C) Class C shares Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (contingent deferred sales charge, or CDSC). Class A shares charge an upfront load. No load funds have no sales charge.

Which of the following is true of closed end funds but not of open end funds? A) Can sell shares of common stock B) Can invest in a variety of securities C) Have a fixed number of shares D) Pay dividends when declared by the board of directors

C) Have a fixed number of shares Open end funds can issue an unlimited number of shares. Closed end funds have a fixed number of shares. The other three choices are true of both open and closed end funds.

Rank the following in order of payment at the time of a corporate liquidation, from first to last. 1.Secured debtholders 2.Preferred stock 3.Subordinated debentures 4.Debentures A) III, IV, I, II B) III, IV, II, I C) I, IV, III, II D) IV, III, I, II

C) I, IV, III, II When a corporation is liquidated, secured debt is paid first, then debentures and general creditors, followed by subordinated debt, preferred stock, and common stock last.

Which of the following describes the position in a call option on a stock with a strike price of 20, a premium of 7, and a current market of 26? A) At the money B) At parity C) In the money D) Out of the money

C) In the money In this case, the strike price is less than the current market value, so a call option would be in the money by the difference between the strike price and the market price (6 points, in this case). At the money means the strike price and the market price are the same; at parity means the premium equals the intrinsic value.

Primary market transactions would include which of the following? A) Sale of $10 million of U.S. Treasury bonds by a broker-dealer acting as a market maker B) Sale of $10 million of municipal bonds by a broker-dealer acting as a market maker C) Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter D) Sale of $10 million of corporate stock by a broker-dealer acting as a market maker

C) Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter Market makers are broker-dealers who sell out of their own account in the secondary market. Underwriters are broker-dealers who help issuers bring their securities to market in the primary market.

Regular way settlement for Treasury bills is: A) T+3. B) T+2. C) T+1. D) same day.

C) T+1. All U.S. government issues settle next business day (T+1).

An investor has asked a mutual fund company for a copy of its Statement of Additional Information (SAI). How long does the fund have to comply with the request? A) SAI must go into the mail on the same day B) Five business days from the date of the request C) Three business days from the date of the request D) By end of week in which the request was received

C) Three business days from the date of the request If an investor asks for a copy of a mutual fund's SAI, the copy must go into the mail no later than the end of the third business day from the date of the request. It must also be supplied free of charge.

Each of the following makes regular interest payments except A) corporate bonds. B) Treasury bonds. C) Treasury STRIPS. D) Treasury notes

C) Treasury STRIPS. Treasury STRIPS have the coupons removed and therefore do not make regular interest payments. Each of the remaining answer choices pays interest on a semiannual basis.

Should a member firm or an associated person be found in violation of Financial Industry Regulatory Authority (FINRA)'s Conduct Rules, a number of sanctions may be imposed. However, under the Code of Procedure, FINRA may not: A) censure the violator. B) issue a fine to a member firm or associate. C) impose a prison sentence on the violator. D) bar an associated person from the industry forever.

C) impose a prison sentence on the violator. Only a court can issue a prison sentence. Each of the remaining answer selections, bar, fine, and censure, are sanctions FINRA could impose under the Code of Procedure.

An investor holding T-bonds will receive interest payments A) annually. B) monthly. C) semiannually. D) biennially.

C) semiannually. Treasury bonds (T-bonds) and notes (T-notes) pay interest on a semiannual basis.

Broker-dealers that transact securities business with customers or other broker-dealers must apply and be approved for registration with: A) the Chicago Board Options Exchange (CBOE). B) the Financial Industry Regulatory Authority (FINRA). C) the Securities and Exchange Commission (SEC). D) the Municipal Securities Rule Board (MSRB).

C) the Securities and Exchange Commission (SEC). The SEC is the securities industry's primary regulatory body. Broker-dealers that transact securities business with customers or with other broker-dealers must apply and be approved for registration with the SEC.

For a new issue that qualifies for listing on an exchange, a prospectus must be provided to all purchasers for how many days after the effective date? A) 60 days B) 90 days C) 40 days D) 25 days

D) 25 days For new issues that qualify for listing on an exchange or Nasdaq (NMS securities), the prospectus delivery requirement period in the aftermarket (after the effective date) is 25 days. For nonlisted and non-Nasdaq (non-NMS) securities, the period is 90 days. For an APO, the reqquirement for NMS securities is 0 days (no requirement). The APO of a non-NMS security is 40 days.

Which of the following statements regarding bond interest is true? A) Bond prices have a direct relationship to interest rates. B) The par value of a bond will decrease as market interest rates fall. C) The par value of a bond will increase as market interest rates fall. D) Bond prices have an inverse relationship to interest rates.

D) Bond prices have an inverse relationship to interest rates. Bond prices have an inverse relationship to interest rates. If interest rates go up, bond prices for those bonds trading in the secondary markets will go down. Conversely, if interest rates decline, bond prices rise. Par value is a fixed number for the life of the bond.

If an associated person is barred from the securities industry, which of the following is true? A) The individual may still serve as an officer or director of a member firm but have no sales function. B) The individual may still be employed as a paid adviser to a member firm. C) The individual may never associate with another member for life. D) The individual may associate with another member firm with SEC permission.

D) The individual may associate with another member firm with SEC permission. If the SEC bars an associated person, no broker-dealer may allow that person to associate with it in any capacity unless the SEC has granted express permission to do so.

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

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

In order for a business entity to qualify as a limited partnership, the LP must have A) any number of limited partners only. B) no general partners and at least one limited partner. C) any number of general partners and no limited partners. D) at least one general partner and one limited partner.

D) at least one general partner and one limited partner. Limited partnerships are required to have at least one general partner and one limited partner.

When the interest rates in the marketplace moves up or down, the price of all bonds move A) conversely. B) subversely. C) reversely. D) inversely.

D) inversely. Interest rates and bond prices move in opposite directions. This is known as an inverse relationship.

All the following are leading indicators except A) stock prices. B) new orders. C) the money supply. D) personal income

D) personal income. The money supply, new orders, and stock prices are all leading indicators. These increase in advance to an increase in economic activity. Personal income, however, is a coincident indicator moving along with economic activity.

The breakeven on a short call is A) the premium. B) strike - premium. C) the strike price. D) strike + premium.

D) strike + premium. The breakeven on a call option, whether held long or short, is the strike price plus the premium. A holder of a short call would like the underlying stock price to go below the breakeven.

All of the following terms and phrases apply to the buy side of the options contract except A) has a right. B) exercises the contract. C) pays the premium. D) wants the contract to expire.

D) wants the contract to expire. The buyer of the contract pays the premium and loses it if the contract expires. The seller receives the premium and keeps it if the contract expires. The buyer has a right to exercise the contract. The seller has an obligation if the buyer decides to exercise.