Missed 2
A customer owns 10M of 7% U.S. Treasury bonds. He is in the 28% federal tax bracket and the 10% state tax bracket. What is his annual tax liability on these bonds? A) $196 B) $266 C) $98 D) $70
$196 The 10M means $10,000. (Remember your Roman numerals? M equals 1,000). His tax liability is as follows: $1,000 times 7% equals $70 annual interest per bond; $70 times 10 equals $700 annual interest, which is taxable only by the federal government; and $700 times 28% equals a $196 tax liability.
A municipal finance professional, who is eligible to vote in a municipality that frequently issues debt securities, has made a contribution to the political campaign of one of the issuer's elected officials. More than which amount would disqualify the firm from engaging in certain municipal businesses with that issuer for two years?
$250 The maximum political contribution allowed under Municipal Securities Rulemaking Board rules for those eligible to vote in the municipality issuing debt on a negotiated basis is $250.
If a customer has a margin account with a long position worth $20,000 and a debit balance of $8,000, what is the purchasing power of this customer's account? A) $4,000 B) $8,000 C) $6,000 D) $2,000
$4,000 The account has $12,000 of equity. If 50% of the market value is $10,000, the account has $2,000 of excess equity. When Regulation T is 50%, the purchasing power of excess equity is 2:1.
Assume that a customer has an established margin account with no special memorandum account, and the account is restricted. With the Regulation T requirement at 50%, the purchase of $10,000 worth of stock would generate a Regulation T call of A) $25,000. B) $20,000. C) $2,500. D) $5,000.
$5,000. The customer must deposit the full margin requirement of the purchase (50% of $10,000), whether the account is restricted or not; therefore, the call would be for $5,000.
An investor has an established margin account with a short market value (SMV) of $4,000 and a credit balance of $6,750, with Regulation T at 50%. How much excess equity does the investor have in the account? A) $1,500 B) $2,000 C) $2,750 D) $750
$750 The Regulation T requirement and equity must be calculated before excess equity can be determined. The Regulation T requirement is 50% of the SMV of $4,000 ($2,000). Equity is calculated by subtracting the SMV of $4,000 from the credit balance of $6,750 ($2,750). Excess equity is calculated by subtracting the Regulation T requirement of $2,000 from the equity of $2,750 ($750).
One of your clients with a margin account is concerned about recent declines in the market price of securities in her portfolio. The current market value of her holdings is $2,100,000, and the debit balance is $900,000. She would like to know how low the value can go before she receives a margin maintenance call. You would reply A) $1,575,000. B) $1,050,000. C) $1,170,000. D) $1,200,000.
1,200,000 The computation for this question is the debit balance ($900,000) divided by 0.75 and that is equal to $1,200,000. At that point, the equity in the account is $300,000, which is equal to 25% of the long market value.
FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the overall expenses and amount of broker-dealer compensation considered fair and reasonable. That limit is
15% of the gross proceeds. If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 10% limitation is on the amount of compensation received by a member firm for selling interests in the DPP. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.
ABC Company issues a 10% bond due in 10 years. The bond is convertible into ABC common stock at a conversion price of $25 per share. The ABC bond is quoted at 90. Parity of the common stock is A) $25.00. B) $22.50. C) $36.00. D) $100.00.
22.50 The bond is quoted at 90, so it is selling for $900. The parity price of the common stock is $22.50, calculated as follows: the bondholder could convert the bond into 40 shares of stock ($1,000 face amount / $25 per share = 40 shares). Because the bond has a current price of $900, divide $900 by 40 to get the underlying parity price (90% × $25 = $22.50).
An investor with $5,000 to spend could purchase approximately how many shares of a mutual fund with a net asset value per share of $13.00, a sales charge of $1.00 and an underwriter's concession of $0.20? A) 357 shares B) 352 shares C) 362 shares D) 378 shares
357 shares Mutual funds sell at NAV plus sales charge. In this case, $13.00 plus $1.00 = $14.00 public offering price (POP). Dividing $5,000 by $14 equals 357 shares. What about the underwriter's concession of $0.20? That is part of the $1.00 sales charge. On each sale, the principal underwriter of the fund earns $0.20 and the selling broker-dealer keeps the other $0.80.
A May and November Treasury bond is traded the regular way on Wednesday, June 8. The number of days of accrued interest is A) 39. B) 38. C) 45. D) 44.
39 Accrued interest on government bonds is based on actual days in a year. Settlement occurs on the next business day. This bond pays interest in May and November, with the most recent payment on May 1. Interest has accrued on this bond for 31 days in May and 8 days in June, for a total of 39 days. The settlement date is Thursday, June 9.
Of the following callable bonds, which confirmation must show yield to call? A) 6% municipal, basis 7%, due 2038 B) 6% municipal, par, due 2038 C) 6% municipal, basis 5.5%, due 2028 D) 6% municipal, basis 6.5%, due 2028
6% municipal, basis 5.5%, due 2028 The only bond priced at a premium is 6% municipal, basis 5.5%, due 2028. On a premium bond, the yield to call will be lower than the yield to maturity.
A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status? A) 90 B) 30 C) 60 D) 45
60 Rollovers from pension plans into IRAs must be accomplished within 60 days to retain tax-deferred status.
On February 7, a customer buys 100 shares of LMN at $39 per share and simultaneously writes an LMN Oct 35 call option at 6. If the call is exercised on July 19, what will she report for tax purposes? A) A $600 loss B) A $200 loss C) A $200 gain D) A $600 gain
A $200 gain The premium received for writing a call becomes part of the stock sales proceeds, for a total of $4,100. Because the investor bought the stock five months earlier for $3,900, she incurred a $200 capital gain (short-term). As is usually the case, it may be easier to see the numbers by using the t-chart.
From the viewpoint of a fundamental analyst, which of the following has little, if any, significance? A) A company reporting higher or lower earnings B) A company reporting higher or lower sales C) A company's stock reaching new highs or lows D) A company's CEO resigning
A company's stock reaching new highs or lows A fundamental analyst looks at the company's internals. That includes management changes, earnings or sales reports, but not anything to do with the trading of the company's stock. That is the purview of the technical analyst.
A technical analyst would find which of the following to be a bullish indicator? A) More odd-lot purchases than sales B) A decrease in the short interest C) A head and shoulders bottom D) A breakout through the support level
A head and shoulders bottom A head and shoulders bottom is a bullish sign to the technician because it indicates that the market has bottomed. From the bottom, the only direction is up. It is an increase to the short interest that is bullish, not a decrease. Because odd-lot traders are generally unsophisticated, the technician believes they are always doing the wrong thing. When they are buying, (more purchases than sales), everyone else should be selling (bearish). The support level is where the stock or index seems to stop declining. It receives buying support. That causes the price to begin to rise. When there is a breakout, it means the stock has fallen below the support level. Falling through the support level is a bearish signal.
Sales made under the provisions of Rule 506(b) of Regulation D must be reported on A) Form D. B) Form 506. C) Form U4. D) Form 13F.
A) Form D. Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering. Form U4 is the application for registration you filled out to become associated with your broker-dealer. There is no Form 506; private placements under Rule 506(b) or (c) use Form D. Form 13F is one you will learn about if you go on to the Series 65 or Series 66.
You have a high-income client who wishes to maximize his after-tax interest income. Which of the following investments might not meet your client's objective? A) AA-rated municipal note B) AA-rated general obligation bond C) AA-rated industrial development bond D) AA-rated revenue bond
AA-rated industrial development bond Industrial development bonds are private-purpose bonds, and the interest income could subject the holder to the alternative minimum tax. Thus, the interest income may not be completely tax free.
Margin requirements on exempt securities (U.S. government securities and municipal securities) are set by A) the Securities and Exchange Commission (SEC). B) the designated examining authority (DEA). C) the Department of Enforcement (DOE). D) the Federal Reserve Board (FRB).
B) the designated examining authority (DEA). The FRB sets the initial margin requirements for nonexempt securities. The margin requirements for exempt securities, such as U.S. governments, are set by a firm's self-regulatory organization or DEA.
A customer enters an order to buy 1,000 ABC at 50, good for the week only. How will this order appear on the order book? A) Buy 1,000 ABC 50 GTM B) Buy 1,000 ABC 50 GTC C) Buy 1,000 ABC 50 GTW D) Buy 1,000 ABC 50 Day
Buy 1,000 ABC 50 GTC Limit orders and stop orders are entered on the order book as either good til canceled (GTC) or day orders. Orders that are good for only a particular time frame (good for the week) will appear as GTC. It is the responsibility of the broker-dealer that entered the order to cancel it at the end of the week, if unexecuted.
The following is taken from the S&P Bond Guide: FLB Zr 37 87 87½. What is the coupon rate on this bond? A) 8.70% B) 0.37% C) 0% D) 8.75%
C) 0% FLB is the issuer, Zr means zero coupon, 37 indicates the year of maturity (2037), 87 is the bid price ($870), and 87½ is the asked price ($875).
Which of the following securities issue is nonexempt, requiring registration under the Securities Act of 1933? A) Municipal bonds B) Debt instruments with maturities of 270 days or less C) Treasury bonds D) Corporate bonds
Corporate bonds Nonexempt means that under the act, the securities are required to be registered with the SEC. Corporate bonds require registration. All of the remaining answer choices are exempt securities, meaning they do not require registration. In general, exempt issues include municipal securities, U.S. government securities, bank issues, short-term debt issues, and nonprofit organization securities.
Which of the following risk factors would be least important to disclose in recommending collateralized mortgage obligation (CMO) securities to public customers? A) Credit risk B) Interest rate risk C) Extended payment risk D) Prepayment risk
Credit risk Most CMOs offered to the public are backed by mortgages held by government-sponsored corporations like Fannie Mae, Ginnie Mae, Freddie Mac, et cetera. Credit risk would be a minimal consideration. The other risks are inherent to mortgage-backed securities.
What is the size of one LEAPS contract? A) 1,000 shares B) No standard LEAPS contract size C) More than 1,000 shares D) 100 shares Explanation Like a standard options contract, the size of a LEAPs contract is 100 shares.
D) 100 shares Like a standard options contract, the size of a LEAPs contract is 100 shares.
A company's changing from straight line to accelerated depreciation will increase income in the early years. decrease income in the early years. increase income in the later years. decrease income in the later years. A) I and III B) I and IV C) II and III D) II and IV
II and III Accelerated depreciation increases charged expenses during the early years of equipment life but decreases charged expenses during the later years.
Dale Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. Wells is looking for favorable tax treatment of earnings and losses. Wells also wants to limit the number of investors but is willing to share control of the enterprise with others to attract them. What business form would you advise? A) S corporation B) General partnership C) Limited partnership D) C corporation
General partnership Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. Although an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.
Which of the following employer-sponsored plans is not required to meet the nondiscrimination provisions of ERISA? A) 401(k) plans B) Deferred compensation plans C) Keogh plans D) Defined benefit plans
Deferred compensation plans Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to who may participate. In any question on the exam, a qualified plan sponsored by a business will most likely have to comply with ERISA.
Under the Securities Act of 1933, the Securities and Exchange Commission (SEC) has the authority to issue stop orders regarding a new issue registration filing. approve new issues. review standard registration forms. guarantee the accuracy of the information contained in the registration forms. A) I and IV B) II and III C) I and III D) II and IV
I and III During the cooling-off period, the SEC reviews registration statements and can issue stop orders if the registration is not complete or was not filed properly. The SEC does not approve securities or guarantee that any information found within a prospectus is accurate; it only clears the securities for distribution (sale) to the public.
KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? Tax rate Cash dividend Allowance for bad debts Retained earnings A) II and III B) II and IV C) I and II D) I and III
I and III Higher taxes mean less net income. The allowance for bad debts is an expense item, and increasing it lowers operating income. Dividends are paid out of retained earnings, which have no effect on the net income the company reports.
According to industry rules, if a customer purchases a bond from your firm, the confirmation must disclose where your firm acquired the bonds if acting as a principal. whether your firm acted as agent or principal. your firm's address. the price your firm paid for the bonds. A) I and III B) II and III C) II and IV D) I and IV
II and III Customer trade confirmations must make explicit disclosures regarding the terms of the transaction and the parties involved. The broker-dealer must always disclose the capacity in which it acted (i.e., principal or agent.) The confirmation must show the name of the person for whom the trade was executed (i.e., the customer). The name, address, and telephone number of the broker-dealer must be shown so a customer may contact the firm easily. The settlement date is also required, but the broker-dealer is not required to disclose where it acquired the bonds or the price it paid.
If an investor sells 1 AMF Apr 50 put for 2.50 and buys 1 AMF May 60 put for 7.75, the investor has profit when the spread narrows. the spread widens. both puts are exercised. both puts expire. A) I and III B) I and IV C) II and IV D) II and III
II and III The investor created a debit spread, which is profitable when both sides are exercised or the spread widens. Conversely, credit spreads are profitable when both sides expire or the spread narrows.
Which of the following statements regarding corporate zero coupon bonds are true? Interest is paid semiannually. The discount is in lieu of periodic interest payments. The discount must be accreted and is taxed annually. The discount must be accreted annually with taxation deferred until maturity. A) II and III B) I and III C) II and IV D) I and IV
II and III The investor in a corporate zero coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. That discount from par represents the interest that will be earned at maturity date. However, the discount is accreted annually, and the investor pays taxes yearly on the imputed interest.
Your client is interested in a direct participation program (DPP) limited partnership. Which of the following are most likely to factor into a discussion on suitability of such an investment? Beta Liquidity Alpha Investor's age A) II and IV B) I and IV C) II and III D) I and III
II and IV The key here is to recognize that with DPPs, the customer's age is a relevant consideration in determining suitability. DPPs are long-term and illiquid. For example, it is unlikely that DPPs would be suitable for a customer near retirement age, regardless of the customer's financial situation. Beta, having to do with measuring an investment's volatility as related to the overall market, and alpha, being a measure of performance adjusted for risk, are not factors generally associated with DPPs.
A customer requests that his broker-dealer hold his fully paid for stock. Which of the following are required? A written stock power from the customer Full power of attorney from the customer to the broker-dealer The securities must be segregated from those of the firm and other customers The customer must be informed that the securities may be withdrawn by him at any time A) II and III B) III and IV C) II and IV D) I and II
III and IV The broker-dealer must segregate the customer's fully paid for securities and inform the customer that the securities can be withdrawn at any time.
If general interest rates increase, the interest income of an open-end bond fund will do which of the following? A) Increase B) Cannot be determined from the information given C) Remain unchanged D) Decrease
Increase What does a bond fund invest in? Bonds. One of the features of an open-end company (mutual fund) is the continuous issuance of new shares. The question states that interest rates are increasing. As that new money is received, the fund's manager will be able to invest in bonds offering that higher return. This will cause the income of the fund to increase. It is not part of the question, but the increase in interest rates will likely lead to the NAV of the fund decreasing (as interest rates go up, the price of the bonds in the fund's portfolio will go down).
A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is true? A) It is not permitted. B) It is permitted if the fiduciary observes the prudent investor rule. C) It is permitted if the fiduciary shares in the profits or losses. D) It is permitted if provided for in the underlying documentation.
It is permitted if provided for in the underlying documentation. Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.
Which of the following option strategies, besides going long a call, can be used to purchase stock below its current market value?
Short put If the put is exercised by the owner, the writer of the put will be obligated to purchase the stock. The cost of the stock is reduced by the amount of premium taken in when the put was written, allowing the investor to purchase the stock at a net cost lower than the stock's current market value.
A customer purchased 10 ABC 9s of 2045 convertible debentures at 99. The debentures are callable at 101. The conversion ratio is 40. Some time later, the debentures are called while the common is trading at $24 and the debenture is trading at 98. Which of the following options would be most beneficial to the customer? A) Wait for a better offer from the corporation B) Convert the bonds and sell the common stock C) Sell the bonds D) Tender the bonds to the corporation
Tender the bonds to the corporation First of all, recognize that the investor purchased 10 of the debentures. They have a coupon of 9% and mature in 2045. None of that is relevant to answering the question, but we want to be sure you understand the terminology.The option most beneficial to the investor is tendering the debentures to the corporation for $10,100 (10 times $1,010). If the debentures were sold on the market, the investor would receive $9,800 (10 times $980). If the debentures were converted into common, the investor would receive 400 common shares (40 shares per debenture times 10) that could be sold for their current price of $24, for a total of $9,600.
All of the following must meet the nondiscrimination provisions of the Employee Retirement Income Security Act (ERISA) except A) 401(k) plans. B) profit-sharing plans. C) defined benefit plans. D) deferred compensation plans.
deferred compensation plans. Deferred compensation plans are nonqualified, and therefore, do not have to meet the nondiscrimination provisions of ERISA.
Which of the following is not good delivery for 470 shares of stock? A) Eight 50-share certificates, one 40-share certificate, and one 30-share certificate B) Four 100-share certificates and one 70-share certificate C) Two 100-share certificates and three 90-share certificates D) Forty-seven 10-share certificates
Two 100-share certificates and three 90-share certificates The key to making good delivery is the ability to stack certificates in piles of 100 shares or multiples of 100 shares (such as a 200-share or 1,300-share certificate). If there is an odd lot (fewer than 100 shares) in the trade, that can be made up of one or any number of certificates totaling that odd lot. If delivery is attempted of two 100-share certificates plus three 90-share certificates, the two 100-share certificates are fine, but there is no way to stack those 90s into piles of 100 shares. Let's look at the choices that are good delivery. Four 100s and one 70 has gives us four stacks of 100 shares plus a stack for the complete odd lot of 70 shares. Eight 50s can be combined two at a time to make four piles of 100 shares; the 40 and the 30 add up to the odd lot of 70 shares so this is a good delivery. Although 47 10-share certificates is a bit awkward (reminds me of being in line at the supermarket when the person in front is paying for their groceries with nickels and dimes and taking forever), 10 shares taken 10 times is 100 shares, and there are enough to do that four times. Then the remaining seven 10-share certificates completes the odd lot. Remember, when using certificates smaller than 100 shares, you must be able to combine them into 100-share lots.
An investor buys 2 LMN 40 calls and pays a premium of 4 each, and also buys 2 LMN 40 puts and pays a premium of 2.50 each. At the time of purchase, LMN is trading at $40.75. On the expiration date, LMN is trading at $32.50. If the investor closes her position for its intrinsic value, excluding commissions, the investor realizes A) a $200 profit. B) a $100 loss. C) a $200 loss. D) a $100 profit.
a $200 profit. Closing out a position is the opposite of the opening transaction. In this situation, the investor opened by buying two calls for a total of $800, and closed them out by selling for their intrinsic value. (Calls have intrinsic value when the market value is above the strike price; in this situation, there is no intrinsic value.) The investor also bought two puts for a total of $500 and closed them out by selling for their intrinsic value of $1,500. (Puts have intrinsic value when the market value is below the strike price; in this situation, the intrinsic value is $7.50 per contract, or 40 − 32.50 = 7.5 × 2 = 15 × 100 shares = $1,500.) The resulting profit on the position is $200 ($1,500 − $1,300), the total of the premiums paid for all of the options.
A customer purchased a full faith and credit bond. This bond would be known as A) a general obligation bond. B) a revenue bond. C) a moral obligation bond. D) a sinking or surplus fund bond.
a general obligation bond. General obligation bonds are also known as full faith and credit bonds.
One of your customers owns 100 shares of GTS common stock. The purchase was made two years ago at a price of $51 per share. GTS has recently declared a 3:2 stock split. At the customer's request, as soon as the new shares are in the account, you sell them and $2,000 from the proceeds of the sale is credited to the customer's account. Based on this information, the tax impact of this transaction is A) a long-term capital loss of $1,400. B) a long-term capital gain of $300. C) a short-term capital gain of $300. D) a long-term capital loss of $1,333 and a short-term capital loss of $667.
a long-term capital gain of $300. Immediately after the stock split, the total investment of the initial position remains unchanged at $5,100 (100 shares at $51 per share). After the stock split, the customer owns 150 shares (3/2 times 100 = 150 shares). Therefore, the adjusted cost basis per share is $34 ($5,100 divided by 150 shares). Those 50 shares were sold for $2,000 and have a cost basis of $1,700 ($34 times 50). That is a profit of $300. Alternatively, you could say that 50 shares sold for $2,000 represents a selling price of $40 per share ($2,000 divided by 50 shares), which is a $6 per-share profit ($40 minus the $34 cost basis). Fifty shares times $6 equals a profit of $300. The gain is long-term because the holding period of securities received through a stock split (or stock dividend) is that of the original purchase. If you have to guess, or are running out of time, when you see two identical numbers with the only difference being short- or long-term gain, in almost all questions, one of those two is the correct answer. Now you have a 50% change of guessing correctly and, if you remember that the holding period always begins with the initial purchase, then the odds are 100% in your favor.
A customer who has, as part of her account holdings, unlisted REITS, as well as a limited partnership interest in an oil and gas program, may expect her servicing member firm to show A) the amount shown on Tape B the business day before the account statement closing date. B) an exact per share value as calculated on the last business day of the month. C) no valuation for the unlisted REITS and the original investment made in the DPP interest. D) a per share estimated value of the securities.
a per share estimated value of the securities. A general securities member must include in a customer account statement a per share estimated value of a DPP or unlisted REIT security, in a manner reasonably designed to ensure that the per share estimated value is reliable.
All of the following items of information must be included in a municipal securities confirmation except A) the date of maturity that has been fixed by a call notice. B) an extraordinary call provision. C) the capacity in which the broker-dealer acted. D) whether the securities are fully registered or book entry.
an extraordinary call provision. Municipal Securities Rulemaking Board rules require that certain information be included on all municipal confirmations, including the capacity in which the firm acted in filling the order, whether the bonds are in registered or book entry form, and any relevant call provisions. Information on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence.
Pursuant to Regulation T, cash dividends received in a customer's margin account A) cannot be removed. B) must be removed within 30 days of receipt. C) can only be withdrawn if the account is not restricted. D) can be withdrawn anytime within the first 30 days of receipt.
can be withdrawn anytime within the first 30 days of receipt. If a customer wishes to withdraw cash dividends, the customer must do so within 30 days of receipt. Otherwise, they become a permanent reduction of the debit balance. The customer does not lose the dividend; rather, the dividend amount is now reflected as increased equity in the account. As the debit balance falls, equity in the account goes up dollar for dollar.
If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold A) until the need for the hold ends. B) for a maximum of 55 business days. C) for a maximum of 55 calendar days. D) for one month.
for a maximum of 55 business days. FINRA Rule 2165 permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted to place a temporary hold on the disbursement of funds or securities from the account of a specified adult customer. The maximum length of the hold is 55 business days. Do we expect the exam will ask you to choose between 55 business and 55 calendar days? No, that is not FINRA's style, but we do want you to know the correct count.
A statutory debt limitation restricts a municipality's authority regarding A) selling revenue bonds. B) insuring bond issues. C) raising tax rates. D) issuing general obligation (GO) bonds.
issuing general obligation (GO) bonds. A municipality may be limited by statute regarding the amount of GO debt it may incur.
For individual public investors, dark pools of liquidity A) allow them to give an order to their broker-dealer to buy or sell securities while only referencing an account known by a number and not their name. B) lessen the transparency of the overall market as volume, quote and price information, and market participant identity is unknown. C) prevent them from having their own orders entered on exchanges for execution. D) allow them to enter orders that are sent directly to the trading floors of stock exchanges.
lessen the transparency of the overall market as volume, quote and price information, and market participant identity is unknown. For individual public investors, dark pools of liquidity lessen the transparency of the overall marketplace. The pools refer to transactions that take place primarily among institutional traders or trading desks in large block transactions away from stock exchange floors, where volume, quote and price information, and participant identity are unknown. Though the existence of dark liquidity pools detracts from market transparency, it does not prevent individual public investors from having their own orders executed on listed exchanges.
All of the following are risks associated with most mutual funds except A) tenure risk. B) expense risk. C) liquidity risk. D) market risk.
liquidity risk. Under federal law, mutual funds must redeem shares within seven days of receipt of the investor's request. There is never a need to find a buyer for the shares. Therefore, mutual funds have little to no liquidity risk. As with any investment, there is market risk for most mutual funds (little to none with money market funds, but they would have to be specified in the question). Expense risk is the uncertainty as to future expenses incurred by the fund. The higher the expense ratio, the lower the performance. Management fees, transaction costs, and regulatory filing fees can change. Another risk is that the management team that has brought the fund great success in the past might leave or be terminated. That is what tenure risk is all about.
Ginnie Mae pass-throughs will pay back both principal and interest A) annually. B) quarterly. C) monthly. D) semiannually.
monthly. Ginnie Mae securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the Ginnie Mae investor monthly.
Sell orders for equity securities A) must be marked only if they are short sales. B) must be marked long or short. C) must be marked only if they are long sales. D) do not need to be marked, only executed in accordance with the appropriate rules.
must be marked long or short. Every sell order in an equity security must be marked as either a long sale or a short sale.
T-bills are quoted A) on an annualized discount yield basis. B) in 32nds. C) in 16ths. D) as a percentage of par.
on an annualized discount yield basis. T-bills do not bear interest. T-bills trade and are quoted on an annualized discount yield basis.
All of the following are subject to the 5% markup policy except A) markups. B) markdowns. C) commissions. D) spreads in new stock offerings.
spreads in new stock offerings. The 5% markup policy applies to markups, markdowns, and commissions. New offerings sold by prospectus are exempt from this rule.
One of the key roles of a registered representative is matching a securities recommendation to a customer's risk tolerance. All of the following statements correctly explain investment risk except A) systematic risk can be reduced or eliminated by effective portfolio diversification. B) a stock's total risk level is a combination of market risk and diversifiable risk. C) investors expect to earn a higher rate of return for assuming a higher level of risk. D) the beta coefficient measures an individual stock's relative variability to returns of the broad market.
systematic risk can be reduced or eliminated by effective portfolio diversification. It is unsystematic (diversifiable) risk not systematic risk that may be effectively managed through portfolio diversification. The total risk of a security is the combination of its systematic and nonsystematic risk. The more a stock's beta increases above 1.0, the greater the variability of the returns when compared to those of the overall market. A beta below 1.0 indicates less variability. The risk/reward relationship is well known in many arenas: if you take greater risks, you expect greater rewards and vice versa.
A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true except A) the interest on these bonds is not considered a preference item for the alternative minimum tax. B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. C) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used. D) there is no debt limitation on the issue.
the disbursement of principal and interest payments must be approved semiannually by the state public service commission. As an exclusion question, we are looking for the false statement. The public service commission would have no approval power over revenue bond interest and principal payments. Because the bond is not backed by the taxing authority of the city, it is a revenue bond rather than a general obligation bond. The funds for payment of interest and repayment of principal are generated through the fees paid by those using the city's water and sewage facilities. Being a public, rather than private, facility, these would not be alternative minimum tax bonds.
A testimonial used by a member firm in connection with retail communications must state all of the following except A) the qualifications of the person giving the testimonial if a specialized or experienced opinion is implied. B) the fact that compensation was paid to the person giving the testimonial if more than $100 in value was paid. C) that past performance is not indicative of future performance and that other investors may not obtain comparable results. D) the time period covered by the testimonial.
the time period covered by the testimonial. The specific time period the testimonial is relating to is not a disclosure item. If a member uses a testimonial in its retail communications, the following rules apply: if more than $100 in value is paid for the testimonial, you must state the fact that it is a paid testimonial; the communication must not suggest that past performance (or the personal experience of the person making the testimonial) is an indication of future performance; and if the testimonial implies that the person is making the statement based on special knowledge or experience, the communication must state the person's qualifications. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements except A) defined contribution plans. B) IRAs. C) variable annuities. D) Keogh plans.
variable annuities. Contributions to a nonqualified variable annuity are not tax deductible. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan. Please note that all annuities are non-qualified unless something in the question indicates otherwise. For example, if the question deals with annuities in a 403(b) plan, it must be qualified.
A customer of yours expresses an interest in purchasing a deferred variable annuity. After a careful analysis, you have determined that this is a suitable investment for the customer. Under FINRA rules, principal approval of this sale must be obtained A) concurrently with the receipt of a complete and correct application package. B) within three business days of receipt of a complete and correct application package. C) before submission of a complete and correct application package. D) within seven business days of receipt of a complete and correct application package.
within seven business days of receipt of a complete and correct application package. FINRA Rule 2330 requires a registered principal to review and determine whether to approve a customer's application for a deferred variable annuity before sending the application to the issuing insurance company. This must occur no later than seven business days after the broker-dealer receives a complete and correct application. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.