Series 7
A broker's broker does all of the following EXCEPT: A) makes a market in securities. B) assists in placing securities. C) conceals the identity of the principals. D) acts as agent for dealers.
Answer: A A broker's broker acts as agent in transactions by facilitating the movement of blocks of bonds. The broker's broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker's broker does not make a market in securities.
In municipal bond language, what is a workable indication? A) Likely bid. B) Likely offer. C) Indication that the issuer will probably award the winning bid to your underwriting syndicate. D) Indication that the managing underwriter will probably award your firm the number of bonds that it has requested.
Answer: A A municipal dealer wishing to dispose of a block of bonds will seek a workable indication from another municipal dealer. The workable indication from another municipal dealer is not a firm bid but a range.
Which of the following best describes a nominal municipal bond quotation? A) Approximate price reflecting current market value with no bid or offer. B) Likely bid or offer. C) Firm bid or offer. D) Subject bid or offer that must be reconfirmed before a trade.
Answer: A A nominal quote is an indication of the approximate market value of a municipal bond, provided for informational purposes only. A nominal quote does not represent an actual bid or offer.
If two brothers open a joint account tenants in common, at year's end, the member firm carrying the account will send Form 1099 to: A) the brother whose Social Security number is on the account. B) either of the brothers. C) both of the brothers. D) the brother with the largest percentage interest in the account.
Answer: A All accounts, joint or otherwise, have a primary Social Security number. The holder of this number receives the year-end statement (Form 1099).
According to MSRB rules, a municipal securities dealer participating in a secondary market joint account may NOT: A) provide quotes (while participating in a joint account) that indicate more than one market for the securities that are the subject of the account. B) respond to quote inquiries with nominal quotations that are clearly indicated as such. C) sell a quantity of bonds exceeding its participation in a joint account. D) charge a markup of more than 3%.
Answer: A Dealers participating in a joint account (either syndicate or secondary) are not allowed to distribute quotes relating to the securities in the account that indicate more than one market for the same securities.
A power of attorney is not required for a registered representative to choose which of the following order instructions? Security to be bought or sold Number of shares to be bought or sold Time of execution Price of execution. A) III and IV. B) I and II. C) I and III. D) II and IV.
Answer: A If a registered representative chooses price or timing of an order only, that order is not a discretionary order and a power of attorney is not required. The order is a not-held order. To be discretionary, the representative must choose one or more of the following: the action (buy or sell), the security, or the amount (number of shares).
When acting as an agent for a customer, MSRB rules require the broker to make a reasonable effort to obtain which of the following? A fair price in relation to prevailing market conditions. The best price. A reasonable price in relation to prevailing market conditions. Quotes from at least three municipal dealers or one broker's broker. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: A MSRB rules require only that municipal securities dealers effect trades for customers at prices that are fair and reasonable in current market conditions.
Which of the following would be of least concern to a registered representative recommending a municipal security to a customer? A) Availability of the security. B) Customer's state of residence. C) Customer's tax status. D) Municipal security's rating.
Answer: A The customer's state of residence and tax status are essential when determining suitability of a municipal security. The security's rating is also important because it measures the bond's safety and quality and should align with the customers risk tolerance. While the availability may pose a challenge for the broker dealer and could potentially add to the cost of the transaction it would be of the least concern regarding suitability unless the cost was in some way prohibitive.
If three individuals have a tenants in common account with your firm, and one individual dies, which of the following statements is TRUE? A) Two survivors continue as co-tenants with the decedent's estate. B) The account must be liquidated and the proceeds split evenly among the two survivors and the decedent's estate. C) Trading is discontinued until the executor names a replacement for the deceased. D) The account is converted to joint tenants with rights of survivorship (JTWROS).
Answer: A The decedent's estate becomes a tenant in common with the survivors.
A customer in the 28% tax bracket owns a 9% ABC Corporation 20-year bond that currently is yielding 8.7%. He is considering buying tax-exempt securities. What is the comparable yield for a municipal bond? A) 0.0626. B) 0.0648. C) 0.1208. D) 0.125.
Answer: A When comparing the yield of a taxable corporate bond to a tax-free municipal bond, use the formula: interest on corporate bond × (100% − tax bracket). In this case, 8.7% × .72 = 6.264%. Remember to use the yield to maturity, not the coupon rate. The bond is currently priced to yield 8.7%. In this case, a tax-exempt bond yielding more than 6.264% will provide a higher after-tax return.
Which of the following statements regarding yield shown on a bond confirmation for a bond that has been called is TRUE? A) A bond confirmation will show the higher of YTC or YTM if a bond has been called under an in-part call provision. B) A bond confirmation will show YTC if the bond has been called under an in-whole call provision. C) A bond confirmation will show YTM if the bond has been called under an in-whole call provision. D) A bond confirmation will show the lower of YTC or YTM if the bond has been called under an in-whole call provision.
Answer: B A bond confirmation for a bond called under an in-whole call provision will show YTC as the bond being called away is certain. However, in the event of an in-part call, there is uncertainty as to whether that particular bond will be called. Therefore, the lower of the YTC or YTM would be shown on the confirmation.
All of the following statements about municipal brokers' brokers are true EXCEPT that they: A) do not maintain inventories. B) perform trades on a principal basis only. C) perform specialized trades for institutions. D) do not perform retail trades with individual investors.
Answer: B A broker's broker does not maintain an inventory of bonds. Therefore, they do not act as principals; they act as agents only in trades between dealers or between institutions. They do no retail business.
If a customer buys bonds that have already been called, the confirmation must disclose all of the following EXCEPT the: A) yield to redemption. B) yield to original maturity. C) redemption price. D) redemption date.
Answer: B A customer who has purchased a called bond has probably purchased one that has been pre-refunded. The yield to original maturity is no longer a factor.
Which of the following callable municipal bonds trading on a 7% basis is most likely to be called? A) 7.5% coupon, callable at 105 in 2010. B) 7.5% coupon, callable at 100 in 2010. C) 6.5% coupon, callable at 105 in 2010. D) 6.5% coupon, callable at 100 in 2010.
Answer: B An issuer will call the higher coupon bonds before calling the lower coupon bonds. Of the two bonds with coupons of 7.5%, the one with the lower call price will likely be called first.
An investor purchased a municipal bond at par to yield 5.5% to maturity. If, two years later, he sold the bond at a price equivalent to a 5% yield to maturity, the investor incurred: A) a capital loss. B) a capital gain. C) no taxable result at this time. D) taxable interest income.
Answer: B Because the investor sold the bond at a price that will yield less than the yield when he purchased the bond, the bond must have been sold for more than the investor paid for it. Therefore, the investor incurred a capital gain-lower yield, higher price.
The dollar price used to compute the yield to call must be recorded on the confirmation of which of the following callable municipal bonds? A) 8s 08 quoted at 8.0. B) 9s 15 quoted at 7.0. C) 6s 07 quoted at 7.5. D) 7s 05 quoted at 9.5.
Answer: B For callable premium bonds quoted on a yield basis, the yield computed to the near term in-whole call is used. The confirmation shows the call date and call price as the expected maturity. The only bond shown quoted at a premium is 9s 15 quoted at 7.0.
A customer purchases a noncallable municipal bond at a discount in the secondary market. All of the following must be on the customer's confirmation EXCEPT: A) yield to maturity. B) rating. C) CU.S.IP number. D) capacity in which the dealer acted.
Answer: B Rating is not a required disclosure. However, if the bond is not rated, this fact must be disclosed. The symbol NR (not rated) is generally used.
A retail customer purchases a municipal bond from your firm. According to MSRB rules, the confirmation must disclose which of the following? Where your firm acquired the bonds. Whether your firm acted as agent or principal. Your firm's address. The price your firm paid for the bonds. A) II and IV. B) II and III. C) I and III. D) I and IV.
Answer: B The broker/dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker/dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker/dealer is not required to disclose where it acquired the bonds or the price it paid.
A customer buys a 20-year 7% bond on a 7.35 basis. The bond is callable in 6 years at 103, in 8 years at 102, in 10 years at 101, and at par beginning in the 12th year. The customer's confirm will show yield to the: A) 12-year put. B) 20-year maturity. C) 6-year call. D) 10-year call.
Answer: B The confirmation of a bond trade must disclose the lower of yield to call or yield to maturity. This bond is being bought at a discount because the basis is higher than the coupon. Because the yield to maturity on a discount bond is lower than the yield to call, this is the yield that will be shown on the confirmation.
One of your customers will be traveling extensively throughout Europe and asks you to not send statements to his home. Under the rules, you are permitted to hold his statements for how many months? A) 6. B) 3. C) 1. D) 2.
Answer: B Under the rules, if a customer is traveling domestically, you may hold his mail for up to 2 months. If traveling abroad, you may hold his mail for up to 3 months.
When a member firm opens an account for a registered representative of another member, the employer-member must be sent written notification: A) within 5 business days. B) before executing an order. C) only if requested by the registered representative. D) either by the representative or by the firm opening the account.
Answer: B When a registered representative of one member firm opens a brokerage account with another member firm, the firm opening the account must send written notification to the registered representative's employer before the execution of any transaction.
Which of the following persons may legally open an account to trade on margin? A) A minor child with approval of a court-appointed guardian. B) An open-end investment company. C) A corporation. D) A custodian of an UTMA account.
Answer: C A corporation may open an account to trade on margin if provided for in the charter and authorized in the bylaws. Both UTMA and UGMA specifically prohibit custodians from either engaging in speculative trading or borrowing money or securities in the name of the minor through trading on margin. Mutual funds are also prohibited from trading on margin.
Which of the following is NOT true in jurisdictions that recognize the marital property designation known as community property? A) Community property laws do not apply to gifts. B) Community property laws do not apply to inheritances. C) Community property applies to property owned individually before a marriage once the marriage has occurred. D) There may be tax implications regarding the dissolution of community property at the time of a divorce, marriage annulment, or death.
Answer: C Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property and laws in states that recognize community property ownership differs from jurisdiction to jurisdiction.
Which of the following are discretionary orders? A customer sends a check for $25,000 to an agent and instructs the agent to purchase bank and insurance company stocks when the price appears favorable. A customer instructs an agent to buy 1,000 shares of ABC Corporation at a time and price determined by the agent. A customer instructs an agent to purchase as many shares of XYZ as the agent considers appropriate. A customer instructs an agent to sell 300 shares of LMN, Inc., when the agent deems the time and price appropriate. A) II and III. B) II and IV. C) I and III. D) I and IV.
Answer: C Discretion authorizes a representative to choose the security, the amount of shares, or whether to buy or sell. Time and/or price alone are not discretionary decisions.
A representative wishes to execute an order for a customer's discretionary account. The municipal dealer has a control relationship with the issuer of the security to be purchased. Under MSRB rules, the representative: A) must wait until the firm terminates the control relationship. B) may refer the customer to a firm that has no control relationship. C) must have specific authorization from the customer. D) may not execute the order.
Answer: C Even in a discretionary account, a registered representative may not exercise discretion when a control relationship exists between the issuer and the dealer without first receiving the customer's permission.
In a discretionary account where the investment objective is preservation of capital and growth, all of the following practices are unsuitable EXCEPT: A) frequent and profitable short-term trading in volatile stocks. B) marking the investment objective on the new account form as high risk. C) maintaining a fixed asset allocation mix which includes under-performing sectors. D) marking order tickets solicited or unsolicited when discretion is used.
Answer: C Maintaining a fixed asset allocation mix is suitable in a discretionary account because it assumes that over time, some sectors will outperform while others underperform.
Which of the following verbal orders can be accepted from a customer without additional documentation? A) Increase my position in ABC. B) Buy 200 shares of computer stock. C) Buy 100 shares of ABC when the price is right. D) Buy $20,000 of quality bank stocks.
Answer: C Prices and time of execution do not require discretionary authority.
All of the following are required by the MSRB on customer confirmations EXCEPT: A) the amount of any commission received on an agency transaction. B) whether the bond is registered or in book-entry form. C) the amount of markdown or markup on a principal transaction. D) the source of any commission received on an agency transaction
Answer: C The amount of markup or markdown must be fair and reasonable, but need not be disclosed.
A customer signs a trading authorization form granting written discretion over the account to the registered representative. All of the following practices are permitted EXCEPT: A) shifting funds among several mutual funds within a fund family, based upon the representative's expectations for market performance. B) notifying the customer periodically of the account's performance. C) indicating that trades in which the representative used discretion were unsolicited or solicited. D) buying or selling stocks without notifying the customer.
Answer: C When discretion is used in a discretionary account, order tickets must be marked accordingly.
It must be approved by a principal of the firm. It must be reviewed frequently. A discretionary order may be placed once the customer has placed a power of attorney in the mail. It must be approved by the SEC. A) I and III. B) II and IV. C) III and IV. D) I and II.
Answer: D A new discretionary account must first be approved by a principal, orders must be approved on the day of the trade, and the account must be reviewed frequently for suitability.
A customer wishes to open a cash account and give trading authorization to a sibling. The required documentation would include which of the following? New account form. Joint account agreement. Customer agreement. Limited power of attorney.
Answer: D If one party wants to give discretionary privileges to a third party in a cash account, a member firm requires a new account form and a limited power of attorney. A limited power of attorney gives the third party trading authority, but prohibits that party from withdrawing assets from the account.
If a customer buys callable municipal bonds, MSRB rules state that the confirmation sent to the customer must disclose the: A) higher of either the yield to call or yield to maturity. B) yield that would result if the bonds were called midway between the date they become eligible to be called and their maturity date. C) nominal yield only. D) lower of either the yield to call or yield to maturity.
Answer: D MSRB Rule G-15 states that the confirmation must indicate the lowest possible yield.
A customer purchases a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield that must be stated is the yield to: A) maturity. B) maturity or yield to call, whichever is lower . C) maturity or yield to call, whichever is higher . D) the 102 call.
Answer: D MSRB rules require that when a call date has been fixed by a prerefunding, the resulting yield to call must be reflected on the confirmation. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event; therefore, it is appropriate to price the bond to the call date. The original maturity on the bond has no further significance.
Your broker/dealer acts as a prime broker for ABC fund. In this arrangement, your broker/dealer is likely to be providing which of the following services? Execution of all transactions for the fund portfolio Clearing services Lending for trades done on margin Ensuring that all exchange-trading rules are complied by A) II and IV B) I and IV C) I and III D) II and III
Answer: D The prime broker would supply clearing services, lending services for marginable transaction, as well as back office support including cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker/dealers.
Under MSRB rules, if a municipal securities dealer has a financial advisory relationship with an issuer, which of the following statements is NOT true? A) The contract must be in writing. B) The contract must set forth the basis of compensation. C) The relationship must be disclosed to purchasing customers. D) The relationship need not be disclosed in communications with the public pertaining to that issuer's securities.
Answer: D When a financial advisory relationship exists, it must be disclosed to all buyers of that issuer's securities, and in any advertising (communications with the public) relating to that issuer.
All of the following MSRB Rules of Uniform Practice requirements may be altered by mutual agreement between dealers EXCEPT the: A) terms of delivery. B) payment of shipping expenses. C) price and time of delivery. D) content of confirmations.
The MSRB regulates the contents of confirmations to standardize information. There must be an original record of the agreement even though dealers may mutually agree to change the terms.
