Quiz3

One of your clients enters a sell stop order at $42.40, limit $42.15. Assume that the trades occur in the following sequence: 42.45, 42.40, 42.75, 42.27, and 41.91. At which of the following prices could this order be executed? $42.27 $42.75

$42.27 $42.75 The only remaining prices that will meet the limit requirement after it is triggered are $42.27 and $42.75. Remember, it takes two trades for any stop order: one to trigger the order, the other for execution.

A broker-dealer can rehypothecate (repledge) up to

140% of the debit balance in a customer's margin account. In a margin account, hypothecation is the pledging of customer securities as collateral for the margin loan the customer will receive. The broker-dealer repledges (rehypothecates) the securities as collateral to the lending bank. Broker-dealers are permitted to pledge up to 140% of the debit balance in the customer's account.

Regulation BI calls for broker-dealers and their associated persons to meet a care obligation when making a recommendation to a retail customer. In describing the nature of the care, the rule requires that those making recommendations adhere to all of these except A) reasonable prudence. B) reasonable skill. C) reasonable diligence. D) reasonable care.

A) reasonable prudence. In the original rule proposal, the SEC had four care requirements, including prudence. After careful consideration of comments received, it "concluded that its inclusion creates legal uncertainty and confusion, and it is redundant of what we intended in requiring a broker-dealer to exercise diligence, care, and skill, and its removal does not change the requirements under the Care Obligation. Accordingly, the Care Obligation requires broker-dealers to ''exercise reasonable diligence, care, and skill'' to meet the three components of the Care Obligation."

The Options Clearing Corporation (OCC) uses which of the following methods to assign exercise notices? A) Assign it to the member firm holding a long position that first requests an exercise B) Assign it on the basis of the largest position C) Random selection D) First-in, first-out (FIFO)

C) Random selection The OCC assigns exercise notices to member firms on a random basis. The members may choose the customers to be exercised on either a random basis or FIFO basis.

An investor looking for an open-end investment company with an objective of providing capital appreciation for its shareholders would most likely choose A) a venture capital fund. B) an income fund. C) a growth fund. D) a bond fund.

C) a growth fund. Growth funds have the goal of producing capital appreciation (growth); that is why they are named as such. This is a case where you "don't look a gift horse in the mouth." Don't venture capital funds also seek growth? Yes, they do, but they are not open-end investment companies.

Under Options Clearing Corporation (OCC) rules regarding options communications with the public, if an educational piece making no projected performance figures or recommendations is distributed to customers, it A) can only be distributed to retail customers. B) can only be distributed to institutional customers. C) need not be preceded by an options disclosure document (ODD). D) need not be approved by a registered options principal (ROP)

C) need not be preceded by an options disclosure document (ODD). OCC communications rules do not distinguish between retail and institutional customers. Therefore, their communications rules apply to all customers. All communications pieces must be approved by an ROP. If the educational piece makes no recommendations or performance projections, it need not be preceded by an ODD, but it must be accompanied by a notice containing a name and address where the ODD can be obtained.

With XYZ trading at $47.50, your customer writes 1 XYZ Jan 50 put and simultaneously writes 1 XYZ Jan 45 call, receiving $600 in combined premiums. Your customer's market attitude is A) speculative. B) bearish. C) neutral. D) bullish.

C) neutral. This position is a short combination where both contracts are in the money. Breakeven points are 51 and 44. Above or below these points, the customer will lose money.

Which of the following statements regarding tax-deferred, noncontributory, defined benefit plans are true? Contribution amounts vary. Benefit payments are fixed.

Contribution amounts vary. Benefit payments are fixed. In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, et cetera.

An underwriter in an Eastern syndicate has a 15% participation. The underwriting is for $20 million, and the underwriter has sold its $3 million allotment. The underwriting closes with $1 million remaining unsold. This underwriter's liability is A) $15,000. B) $0.00. C) $1,000,000. D) $150,000.

D) $150,000. An Eastern syndicate is an undivided account. That means that each member is responsible for its share of any unsold portion. This underwriter's commitment is 15%, so that percentage of the $1 million remaining is $150,000. If this were a Western syndicate (divided), the underwriter would have had no liability.

he term high-yield bond would apply to a bond with a Moody's rating of A) Baa. B) BBB. C) BB. D) Ba.

D) Ba. High-yield bonds are those whose ratings fall below investment grade. Investment grade is the top four. Using Moody's descriptions, ratings run from Aaa to Aa to A to Baa to Ba to B and then below. The first rating below the top four is Ba. That is equivalent to a BB rating from Standard & Poor's (but the question asks specifically about Moody's).

If a U.S. corporation exports machine tools to Switzerland and will be paid in Swiss francs (SF), to protect against foreign-exchange risk, it should A) buy SF calls. B) sell SF puts. C) sell SF calls. D) buy SF puts.

D) buy SF puts. There are two important acronyms to remember, EPIC and IPEC. Referring to U.S. based companies, Exporters buy Puts and Importers buy Calls. Because there are no options on the U.S. dollar, the Swiss company should buy calls on its own currency to hedge In other words, EPIC works in reverse if the question is dealing with a foreign company. Then it is IPEC for Importers buy Puts and Exporters buy Calls.

Stocks that are listed on the NYSE can also be listed on A) the BOX Exchange LLC. B) the CBOE (Chicago Board Options Exchange). C) the OTCBB (Over-the-Counter Bulletin Board). D) the Nasdaq Stock Market.

D) the Nasdaq Stock Market. NYSE-listed securities can be listed on and trade on other U.S. exchanges including the Nasdaq Stock Market.

The most stringent test of a corporation's ability to meet its current obligations is A) the current ratio. B) the price-to-earnings ratio. C) the debt-to-equity ratio. D) the quick ratio.

D) the quick ratio. The quick ratio, sometimes called the acid-test ratio, is a more stringent test than the current ratio because it excludes inventory. The debt-to-equity ratio deals with long-term debt rather than current liabilities. The price-to-earnings (P/E) ratio does not deal with assets and liabilities.

One of your customers does not want the risk of taking physical possession of their stock certificates. As the same time, the customer does not want them in street name. Which of the following two options would work for your customer? I. Give the broker-dealer transfer and hold instructions IV. Use the direct registration system

I. Give the broker-dealer transfer and hold instructions IV. Use the direct registration system One option is to have the securities registered into the customer's name but have the broker-dealer hold them in safekeeping. Some firms make a charge for custody, but often waive it for larger accounts. Another option is the Direct Registration System (DRS), where the ownership is recorded electronically (book-entry) in the name of the investor on the issuer's records. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Potential investment company clients should be advised to investigate a fund by looking at which of the following? I. Investment policy IV. Portfolio

I. Investment policy IV. Portfolio Investment policy, track record, portfolio, and sales load should all be researched when assessing a fund. The identity of the custodian bank for the fund or the number of shares outstanding does not bear on its performance or suitability.

Which of the following securities would have a Moody's MIG rating?

TANs TANs are tax anticipation notes. These are short-term municipal securities and that is what Moody's MIG ratings represent.

A Treasury bond is quoted in The Wall Street Journal as follows: Bid 100:15 Asked 100:17 Bid Chg. -1 Yield 7.9 From this information, you know that the nominal yield is

greater than 7.90%. The Bid and Asked prices show that the Treasury bond is being quoted at a premium (above par), with a yield to maturity of 7.9%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.

When a member firm sells municipal bonds to a customer out of its inventory, it must indicate the amount of markup on the customer's confirmation.

indicate the amount of markup on the customer's confirmation. In a principal transaction (out of its inventory), the markup must be disclosed on a confirmation, and because it is a principal transaction, commissions would not apply.

Earlier in the day, you entered a customer order to buy 300 XYZ at 26.45 good til canceled (GTC). By late afternoon, you notice that XYZ is trading at your customer's limit price. At the close of trading, you contact the order desk and get a Nothing Done report because A) of the normal time delay between execution and execution reports. B) of the small size of the order. C) of stock ahead. D) the order was canceled at the close of trading.

of stock ahead. All limit orders stand in time priority.

One of your customers exercises a put option. The stock is in the customer's account and your firm makes timely delivery. The proceeds from the sale of the stock will be paid to your firm by

the broker-dealer to whom the exercise notice was assigned.

One of your clients frequently enters unsolicited orders to purchase penny stocks. This means

the client receives monthly statements. Once a client's account contains penny stocks, monthly account statements are required

You are asked to read the prospectus for a new issue of preferred stock for a client. You would expect the prospectus to include

the effective date and stated dividend rate. The prospectus for a preferred stock will include the effective date and dividend information. Remember, preferred stock carries a fixed dividend stated either as a percentage of par or a stated dollar amount.

One of your customers is concerned about future inflation. Which of the following mutual fund recommendations is likely to be the most suitable? A) A common stock growth fund B) A U.S. Treasury bond fund C) A balanced fund D) A municipal bond fund

A) A common stock growth fund On this exam, the investment most likely to provide inflation protection is common stock.

Which of the following instruments is essentially a letter of credit? A) Bankers' acceptances B) Negotiable CDs C) Margin loans D) Commercial paper

A) Bankers' acceptances A letter of credit (LOC) is a commitment, usually made by a commercial bank, to honor demands for payment of a debt upon compliance with conditions and/or the occurrence of certain events specified under the terms of the letter of credit. Those in the import/export business use these LOCs in the form of bankers' acceptance

One of your customers calls for an explanation of the net amount due showing on a confirmation of a recent purchase transaction. The customer has multiplied the number of shares times the price per share, and that is lower than the amount the confirmation says is due. You would explain that the net amount is determined by A) adding the commission and any firm-added fees to the principal amount. B) adding the spread to the principal amount. C) adding the interest to the principal amount. D) subtracting the markdown from the principal amount

A) adding the commission and any firm-added fees to the principal amount.

A limited partner (LP) invests $100,000 in a movie production limited partnership with a nonrecourse note for $300,000. The partnership liquidates, and the LP receives $100,000. His loss, for tax purposes, is A) $100,000. B) $0. C) $300,000. D) $200,000.

B) $0. LPs are liable for their investments and any shares of recourse debt. They are not liable for nonrecourse debt. Because the LP received the full amount of his original investment at the liquidation of the partnership, he has no loss to declare.

Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction? A) Lowest bid B) Lowest ask C) Highest bid D) Highest ask

B) Lowest ask Markups are always based on the inside offer, which is the lowest ask price in a particular security. Markdowns are based on the inside bid, which is the highest bid price for a particular security.

The City of Podunk has an outstanding 25-year maturity issue that is callable in seven years. It has prerefunded the issue and established an escrow account containing the proper government securities with face amounts and maturities approximating the call provisions of the original issue. In quoting the original issue, which of the following must be used? A) The lower of the yield to call or the yield to maturity B) Yield to call C) Current yield D) Yield to maturity

B) Yield to call When a bond issue is prerefunded, the issuer is going to redeem the bond on the first call date. The yield must be quoted to call.

A municipal bond, issued with a covenant that states, "If revenue collections are not sufficient to meet debt service requirements, the issue will be backed by the full faith and credit of the municipality," is known as A) a moral obligation bond. B) a double-barreled bond. C) a contingent liability bond. D) a Section 8 bond.

B) a double-barreled bond. When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as a double-barreled bond.

The locate requirement of Regulation SHO for short sales does not apply to A) American depositary receipts traded on the Nasdaq Stock Market. B) nonconvertible bonds traded on the NYSE. C) preferred stock traded on the NYSE. D) over-the-counter equity securities.

B) nonconvertible bonds traded on the NYSE.

You are analyzing a company's financial statements, including the balance sheet. You are specifically focusing on the company's liquidity, using the formula current assets minus current liabilities. What liquidity calculation are you using?

C) Working capital You are calculating working capital (current assets − current liabilities).

Features of an employee stock purchase program (ESPP) include all of the following except A) the purchase price is discounted. B) participants can sell the stock at any time. C) contributions are made with pre-tax dollars. D) contributions are a percentage of pre-tax income.

C) contributions are made with pre-tax dollars Employee stock purchase plans (ESPPs) are not qualified plans. That means that the employee purchases the stock with after-tax dollars.

The document attesting to the formation of a limited partnership, filed with designated authorities, is called A) the subscription agreement. B) the offering memorandum. C) the certificate of limited partnership. D) the registration statement.

C) the certificate of limited partnership. The Uniform Limited Partnership Act requires that two or more persons sign and swear to a certificate of limited partnership. It is filed with the state and is a public document available for review.

In a customer's margin account, a broker-dealer must segregate A) 50% of the equity balance. B) 140% of the debit balance. C) the excess securities above 140% of the accounts debit balance. D) 100% of the long market value.

C) the excess securities above 140% of the accounts debit balance. A broker-dealer may hypothecate (pledge) 140% of a customer's debit balance. Any customer securities in excess of 140% of the debit balance must be physically segregated.

Which of the following taxes is considered regressive? A) Inheritance B) Estate C) Income D) Sales

D) Sales Sales tax is considered regressive because the rate remains constant irrespective of the amount being taxed