quiz 4
Which of the following choices would BEST describe a "follow-on" offering? A)The common stock that is issued attached to a "rights" offering B)An issue of shares by a public company that is already listed on an exchange C)An offering to the employees of the issuing company D)An IPO that has additional shares added by the issuer on the effective date
A)The common stock that is issued attached to a "rights" offering Explanation A follow-on public offer (FPO) is an issue of shares by a public company (registered and reporting to the SEC) that is currently listed on an exchange and has previously gone through the IPO process. FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue. Reference: 1.4.2 in the License Exam Manual
Which of the following BEST fits the description of a "growth" stock? A)Common shares in companies that retain earnings and pays little or no dividends B)Common shares in companies that pay a high dividend on rapid growth experience C)Preferred shares in companies that back stated dividends with investments in pharmaceutical companies D)Common or preferred shares in companies, which experience growth in unusual, nonrecurring profitable circumstances
B)Common shares in companies that pay a high dividend on rapid growth experience Explanation Most every industry passes through phases; introduction, growth, maturity, and decline. An industry is in its growth phase if it is growing faster than the economy as a whole due to e.g. technological changes, new products, or changing consumer tastes. Because growth companies retain nearly all of their earnings to finance business expansion, growth stocks pay little or no dividends. Reference: 1.3.2 in the License Exam Manual
Under the Securities Exchange Act of 1934, registration is required for 1. broker-dealers 2. initial public offerings (IPOs) 3. securities 4.securities exchanges A)I and II B)II and III C)I and IV D)III and IV
B)II and III 2. initial public offerings (IPOs) 3. securitie Explanation Under the Securities Exchange Act of 1934, broker-dealers and exchanges are required to register with the SEC. Registration of securities and IPOs is a requirement of the Securities Act of 1933, sometimes called the Paper or New Issues Act. Reference: 1.1.1 in the License Exam Manual
When the economy shows high unemployment and is failing to expand as measured by a lack of consumer demand and business activity, but prices for goods and services are still rising, this could be described as what? A)Deflation B)Stagnation C)Stagflation D)Inflation
C)Stagflation Explanation Stagflation is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy is not growing and there is a lack of consumer demand and business activity, yet prices for goods continue to rise. Reference: 1.3.2 in the License Exam Manual
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)Prime/Executing B)Introducing/fully disclosed C)Market making D)Clearing/carrying
CLEARING/CARRYING Explanation 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. Reference: 1.1.4 in the License Exam Manual
During the 20-day cooling-off period, solicitations of sales can be made solicitations of sales may not be made deficiency letters, if issued, are sent to the issuer deficiency letters, if issued, are sent to the underwriters. A)II and III B)I and III C)II and IV D)I and IV
D)I and IV Explanation No solicitations of sales are permitted during the cooling-off period. If a deficiency letter is issued by the SEC halting the review of the registration, it is sent to the issuer who is responsible for correcting the deficiency. Reference: 1.4.3 in the License Exam Manual
Carrying firms may NOT A)send trade confirmations and statements to customers B)clear and settle transactions for their customers C)execute transactions for their customers D)mix customer funds and securities with their own
D)mix customer funds and securities with their own Explanation Carrying firms can do trade executions, clear and settle transactions, and handle all back-office tasks, such as sending trade confirmations and statements. While they can take custody of customer funds and securities, they may not commingle them with those belonging to the firm. Abiding by the rule is known as segregating customer funds and securities. Reference: 1.1.4 in the License Exam Manual
A company that offers sales of another company's securities would BEST be described as a(n). A)issuer B)market maker C)underwriter D)transfer agent
MARKET MAKER Explanation A broker-dealer (investment banker) that works with an issuer to bring the issuer's securities to the market by offering the securities for sale to investors is best described in this context as an underwriter. Reference: 1.1.4 in the License Exam Manual
Which regulatory body oversees trading in the over-the-counter (OTC) market? A)MSRB B)SEC C)FINRA D)NYSE
MSRB Explanation FINRA regulates all matters related to investment banking (securities underwriting), trading in the OTC market, trading in NYSE-listed securities, and the conduct of FINRA member firms and associated persons. FINRA also regulates investment companies and limited partnership transactions. Reference: 1.1.2 in the License Exam Manual
Considered the most volatile of the benchmark interest rates in the economy would be A)the prime rate B)the discount rate C)the federal funds rate D)the broker call loan rate
THE PRIME RATE Explanation The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates. Reference: 1.3.1 in the License Exam Manual
The Securities Act of 1933 requires that all of the following be offered by a prospectus EXCEPT: A)Mutual fund shares. B)Variable annuities. C)Unit investment trusts. D)Treasury bonds.
Treasury bonds. Explanation Treasury securities are exempt from registration requirements, and therefore do not require a prospectus. Reference: 1.4.4 in the License Exam Manual
When the demand for money exceeds the supply,
interest rates fall, making consumer borrowing easier Explanation Money available to lend is like all commodities in that its cost (interest) is impacted by supply and demand. When the demand for money exceeds the supply, interest rates rise, making consumer borrowing more difficult Reference: 1.3.1 in the License Exam Manual
Under the Uniform Securities Act (USA), state laws require that registered representatives must register in a state in which circumstances?
1. The registered representative is a resident of the state. 2. The registered representative solicits business in the state. Explanation State laws require that broker-dealers with an office in the state, or those that direct calls into the state or receive calls from the state, be registered in that state. Registered representatives must register in a state if they are residents or if they solicit business in a state. Reference: 1.4.3 in the License Exam Manual
Securities sold in an issuer-related transaction would best be described as A)a split offering B)a balance of payments C)a primary offering D)a secondary offering
A PRIMARY OFFERING Explanation When an issuer offers stock and the proceeds from the sale are added to the company's capital, it is called a primary offering. By contrast, a secondary offering is one in which one or more shareholders in the corporation sell all or a portion of their equity holdings to the public. The proceeds of a secondary offering are paid to the selling shareholder(s), not the company. Reference: 1.4.2 in the License Exam Manual
A registered securities broker-dealer that does not comply with FINRA and SEC rules and regulations is subject to each of the following sanctions: EXCEPT: A) Reductions in SIPC coverage. B) Partial or full suspension of its registration. C) Limits on activities, functions, or operations. D) Censure.
REDUCTIONS IN SIPC COVERAGE Explanation Broker-dealers that do not comply with SEC and FINRA rules and regulations are subject to censure, limits on activities, functions, or operations, suspension of its registration, revocation of registration, fines and more. Reference: 1.1.1 in the License Exam Manual
Regarding the registration of securities with the Securities Exchange Commission which are exempt?
C)Private securities offerings are generally exempt from registration. Explanation Private placements are generally exempt from the registration requirements of the Securities Act of 1933. Reference: 1.4.2 in the License Exam Manual
The U.S. balance of payments deficit would decrease in all of the following scenarios EXCEPT A)a decrease in dividend payments by U.S. companies to foreign investors B)an increase in exports of domestic goods from the United States C)a decrease in imports of foreign goods into the United States D)a decrease in purchases of U.S. securities by foreign investors l
D)a decrease in purchases of U.S. securities by foreign investors Explanation A deficit in the balance of payments occurs when more money is flowing out of the country than in. When foreign investors decrease their purchases of U.S. securities, the flow of money coming into the United States decreases, this adds to the deficit rather than decreasing it. Reference: 1.3.3 in the License Exam Manual
To ease its monetary policy, allowing consumers to borrow more easily, the Federal Reserve Board can A)raise the federal funds rate B)lower the federal funds rate C)lower the discount rate D)raise the discount rate
LOWER THE DISCOUNT RATE Explanation Wanting to ease its monetary policy, which would allow consumers to borrow more easily, the Federal Reserve Board can lower the discount rate—the rate it charges its member banks for short-term loans. This frees up more money for its member banks to lend to consumers. The federal funds rate isn't one charged by the FRB but instead by large commercial banks to one another. Reference: 1.3.1 in the License Exam Manual
Some institutions can function as a depository and intermediary for settling transactions between buyers and sellers of securities. All of the following are acceptable for this purpose EXCEPT. A)the National Securities Clearing Corporation B)national banks C)the Depository Trust Company D)carrying firms
NATIONAL BANKS Explanation Being a bank alone does not allow for serving as a depository or clearing facility for securities transactions. The National Securities Clearing Corporation and the Depository Trust Company are set up specifically to perform these functions, and they may also be performed by broker-dealers known as carrying or clearing firms. Reference: 1.1.4 in the License Exam Manual
A company is looking to raise additional capital to fund an expansion plan. The company's senior management chooses to issue additional bonds to the general public. The best expression to explain this type of offering would be a(n) A) primary offering B) private securities offering C) initial public offering D) secondary offering
PRIMARY OFFERING Explanation A primary offering is one in which the proceeds raised go to the issuing corporation, municipality, or government. The corporation in this case looks to increase its liquid capital by offering bonds. Primary offerings of bonds may be made by an issuer publically, as is the case here, or privately. This question points to an additional public offering (APO) of securities, not an initial public offering. Reference: 1.4.2 in the License Exam Manual
