SIE FINAL EXAM 01
A company has announced a tender offer for its shares at $50. The issuer wants to purchase a minimum of 100,000 shares, up to a maximum of 1,000,000 shares. If 80,000 shares are tendered, how much will an investor receive if he has tendered 1,000 shares?
$0 - (Since the tender offer has a minimum of 100,000 shares and only 80,000 shares have been tendered by investors (i.e., put up for sale), the company will not buy any shares. If the tender had crossed over the minimum of 100,000, then the investor would have tendered all of his shares and received $50,000. If the tender had gone over the maximum, the investor's tender would be filled on a pro-rata basis.)
A 5% $1,000 par value bond sells at $900 and matures in 10 years. What is the amount of each interest payment?
$25 - (Bonds pay interest every six months (semiannually). The dollar amount of interest payments is computed as a percentage of the par value. In this example, the coupon rate is 5%. The annual interest payment is $50 (5% of $1,000 par value). Each interest payment is one-half of that amount, or $25.00.)
A U.S. Treasury bond is selling in the market at 95.18. The dollar value of this bond is:
$955.62 - (U.S. Treasury bonds are quoted in full points and 32nds of a point. A T-bond quote of 95.18 represents 95 18/32. By converting the fraction to a decimal, the quote becomes 95.5625 percent of the par value of $1,000. $1,000 x 95.5625% = $955.62.)
A company wants to buy back some of its shares from existing shareholders through a tender offer. The company offers to buy up to a maximum of 5 million shares at $15 per share, but sets no minimum number of shares to purchase. A shareholder wants to sell 3,000 shares. If 4.9 million shares have been tendered, how many of the investor's shares will the company buy?
3,000 - (Since there's no minimum set on the tender offer and the company hasn't reached the maximum of 5 million shares, the company will buy all 3,000 shares from the investor. If the tender had a minimum threshold and the minimum had not yet been reached, the company would not buy any of the investor's shares (i.e., 0 shares). If the tender was oversubscribed (i.e., shareholders wanted to sell more than 5 million), then the investor would've been able to sell a pro rata or proportionate number of her shares back to the company)
The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is:
4.26% -(The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.)
An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is:
5.30% - (The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond's yield will be the same as the coupon rate, which is 5.30%.)
A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield?
8.3% (To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. The yearly interest is $80. The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%). The fact that these are convertible bonds is not relevant.)
What's a general obligation (GO) bond?
A bond that's backed by taxes imposed by a local municipality - (A general obligation (GO) bond is a type of municipal bond. On a GO bond, the debt service (i.e., interest and principal payments) are paid for by taxes imposed by a municipality. On the other hand, revenue bonds are backed by the revenue of a municipal project or facility. Corporate bonds are backed by a corporation. Treasury bonds are backed by the full faith and credit as well as the taxing authority of the U.S. federal government.)
Which of the following statements is TRUE concerning periodic payment variable annuities?
A client's number of annuity units never changes - (During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.)
Jamie has inherited 500 shares of an investment company. She calls her broker to redeem the shares and is informed that the kind of investment company she owns makes no provision for future purchases or redemptions. What kind of investment company does she own?
A closed-end fund - (A closed-end fund makes no provision for future purchases or redemptions from the issuing fund. Shares are bought and sold in the open market in the same manner as the common stock of corporations. All of the other types of funds listed do provide for future purchases to and redemptions from the fund.)
Which of the following is the likely result of persistent deflation?
A decrease in interest rates
All of the following persons are permitted to be named as a trusted contact person for a senior investor, EXCEPT:
A law firm
A 529A or ABLE account is permitted for which of the following persons?
A person who has a significant disability
If a broker-dealer's trading desks purchases a large block of stock during the last minutes of trading in an effort to drive up the price, it is:
A prohibited practice that's referred to as marking-the-close
If a temporary hold has been placed on an account, it will expire:
After 15 business days
When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's:
Agent (A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown.)
Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT:
All are government guaranteed - Government-sponsored enterprise securities are not guaranteed by the government.
A French company would like to have its stock traded in the U.S. securities markets. This would most likely be accomplished through the issuance of:
American Depositary Receipts
Which of the following may NOT occur during the waiting period of the securities registration process?
An RR accepts a cash deposit for the offering from an interested customer
A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client?
An S&P 500 Index mutual fund (Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.)
Which of the following is classified as a joint account?
An account shared between two brothers.
A husband and wife have combined earnings of greater than $300,000 in each of the last two years. If it's reasonably expected that this level of income will remain the same, the couple is considered:
An accredited investor (Accredited investors have a net worth of $1 million (excluding their primary residence) or annual income of $200,000 in each of the last two years. For married couples to be considered an accredited investor, they need to have income of at least $300,000. A qualified institutional buyer (QIB) must be institution with $100 million in assets under management (AUM), but is NOT a natural person.)
In which of the following funds is the percentage that's invested in each of the various asset categories adjusted as financial markets change?
An asset allocation fund - (Asset allocation funds hold diversified portfolios of stocks, bonds, and money-market instruments. The percentage of the portfolio invested in each of these categories is shifted by the fund manager from time to time, often according to computer models.)
Which of the following persons can a registered representative either make a loan to or borrow money from without providing notification to her employer?
An institution that's in the business of borrowing or lending funds - (Registered representatives can borrow money from or loan money to a customer that regularly provides loans (e.g., a bank) without permission. However, for an RR to borrow from other employees, friends, and business partners, she's required to obtain permission from her employer.)
The investments that tend to perform the WORST during periods of inflation are:
Bonds (Bonds tend to perform the worst during periods of inflation since rising interest rates will result in falling bond prices and a decrease in the purchasing power of the interest payments. Mutual funds, ETFs, and gold and silver commodities tend to be good investments for a person seeking to offset inflation.)
If a market maker has a current quote of 50.00 - 50.05 (15 x 20), this indicates that the firm is willing to:
Buy 1,500 shares at $50.00 and sell 2,000 shares at $50.05
As it relates to the sale of variable contracts, which of the following is NOT considered non-cash compensation under FINRA rules?
Commissions - (FINRA has specific rules for both "cash" and "non-cash" compensation when selling variable annuities and variable life insurance. According to FINRA, "cash" compensation includes discounts, concessions, fees, service fees, commissions, asset-based sales charges, loans, overrides, or cash benefits received. "Non-cash" compensation includes merchandise, gifts and prizes, as well as expenses for travel, meals, and lodging.)
Which of the following choices would NOT be subject to the holding period restriction under Rule 144?
Control stock acquired through an open-market purchase - (There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period.)
During a period of stable interest rates, which type of preferred stock tends to be the most volatile?
Convertible (Convertible preferred stock may be converted into a fixed number of common shares of the same issuer. For that reason, if the common stock into which the preferred stock may be converted has appreciated above the parity price, the value of the convertible preferred will also rise. During a period of stable interest rates, the other types of preferred stock tend to remain stable.)
A stock that typically performs in parallel to the changes in the economy is referred to as a:
Cyclical stock - (the performance of a cyclical stock normally runs parallel to changes in the economy. Examples of cyclical stocks include machine tool companies, construction firms, as well as transportation and energy companies.)
The investments in a Coverdell Education Savings Account (CESA) are:
Determined by the investor
A firm is the managing underwriter of a follow-on offering of a security that's listed on the NYSE. The aftermarket prospectus delivery rule:
Does not require the firm to deliver a prospectus-(If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there's no aftermarket prospectus delivery requirement for dealers. An issuer that's listed on the NYSE or Nasdaq is required to file reports with the SEC (a reporting issuer). If the issuer was filing for an IPO (a non-reporting issuer) and the securities will be subsequently listed on the NYSE or Nasdaq, the firm is required to deliver a prospectus to any purchaser in the aftermarket within 25 days of the effective date.)
Which of the following statements BEST describes exchange-traded notes (ETNs)?
ETNs are debt instruments linked to the performance of a commodity, currency, or index (Exchange-traded notes (ETNs) are a type of unsecured debt security. This type of debt security differs from other types of fixed-income securities since ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity.)
A corporation will be paying a cash dividend to its shareholders. On what date will the market price of the stock be reduced?
Ex-date (The ex-date is the first day that a stock trades without its dividend included in its price. On the ex-date, the stock's price is reduced by the amount of (or enough to cover) the dividend)
Which of the following risks does not apply to both foreign and domestic debt instruments?
Exchange - (Exchange (rate) risk could result in investors suffering losses due to a foreign currency losing value against the U.S. dollar. However, an investor who buys U.S. dollar denominated (domestic) debt is not subject to exchange risk. Interest rate risk is experienced when interest rates rise and prices of bonds fall, which impacts both foreign and domestic bonds. Repayment risk is an issue that impacts both foreign and domestic debt, since both foreign and U.S.-based issuers could default. Political risk could also impact both foreign and U.S. investments.)
When interest rates are trending upward, the economy will normally be in which phase of the business cycle?
Expansion
The SEC rules regarding the record retention generally require that records be kept in an easily accessible location for the:
First two years
Final arbitration awards against registered representatives and/or firms are reported on which of the following forms?
Form U6 - (Form U6 is used to report disciplinary actions against RR's and firms as well as final arbitration awards against individuals or firms. Form U4 is filed with FINRA when a person is applying for securities registration. Form U5 is filed with FINRA when a person's registration is terminated. Form BD is filed by brokerage firms to register with FINRA, the SEC, and states.)
A previously registered person was convicted of a felony 14 years ago and has served out his sentence in federal prison. If he's now seeking employment as a registered representative, he should be informed that:
He may be hired as a registered representative
All of the following characteristics would be associated with a growth company, EXCEPT that it has a:
High dividend payout ratio
Three business partners have opened a brokerage account as Joint Tenants with Right of Survivorship (JTWROS). All of the following statements are TRUE, EXCEPT:
If one partner dies, his interest in the account will pass to his estate - (An account that is established under the JTWROS, the interest of a deceased owner will pass to the surviving owners of the account. If the account had been opened under the Tenants-in-Common form of ownership, the deceased partner's portion would flow to their estate.)
An registered person has purchased two tickets to attend a basketball game with a client. If the tickets cost $85 each, which of the following statements is NOT TRUE?
If the registered person did not attend the game and gave one of the tickets to the client, it is a violation. (Under FINRA rules, member firms and their associated persons may not provide gifts that exceed $100 per year to employees of other firms when the gift is in relation to the securities business of the recipient's employer. The underlying concern is that excessive gifts could cause the recipient to act contrary to the interests of the broker-dealer and/or clients. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (e.g., boxes of pens, key chains), and expenses related to legitimate business travel. For an activity to be considered an expense, the associated person of a broker-dealer must attend the event with the client. This type of activity is considered a legitimate expense. Since one ticket is valued at $85, it may be given to the client. On the other hand, two tickets being given to the client exceeds the $100 limit. Although approval by a principal is not required, a member firm should have this type of activity included in its policies and procedures manual.)
A broker-dealer must establish information barriers between which two departments?
Investment banking and trading (Information barriers must be maintained at firms to prevent the flow of certain information between different departments at the firm. Much of the focus is on preventing the free flow of information between investment banking and other departments. In fact, most of the communication between investment banking and other departments is made through compliance)
A registered representative is sending an email to five clients. Which of the following statements is TRUE?
It is considered correspondence and subject to review by a principal.
Which of the following statements about Form 10-K is TRUE?
It must be filed with the SEC within 60 days of the end of the fiscal year.
Which of the following statements is NOT TRUE about a fidelity bond?
It protects customers in the event their broker-dealer goes bankrupt. - (A fidelity bond does not protect customers in the event of broker-dealer bankruptcy; that's the role of SIPC. Instead, a fidelity bond is insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. The bond covers securities that are held at the brokerage firm as well as those in transit. FINRA must be notified if the bond is cancelled or substantially modified.)
Which of the following are short-term trading vehicles?
Leveraged ETFs (Due to the inherent volatility of leveraged ETFs, they are appropriate as short-term trading vehicles. Each of the other choices are considered longer term investments.)
Which types of investments have historically shown a great deal of sensitivity to regulatory risk?
Limited partnerships - (Regulatory risk is the possibility that changes in regulations can have an adverse impact on the value of investments. This is very similar to legislative risk, which is the risk associated with changes in laws. Although all kinds of investments can be subject to regulatory and legislative risk, limited partnerships have historically been particularly vulnerable. For example, adverse changes in the tax laws can cause the value of many limited partnerships to decline. )
If investor wants to receive immediate execution, he should enter a:
Market order
All of the following statements concerning hedge funds are TRUE, EXCEPT the funds:
Must register under the Investment Company Act of 1940 if offered to U.S. residents
Which of the following securities would be subject to federal securities registration requirements?
Mutual fund shares
An investor has a portfolio in which 25% is invested in an oil company, 35% is invested in a pharmaceutical stock, 30% is invested in an exchange-traded fund that tracks the S&P 500 Index, and the final 10% is invested in money-market funds. Which of the following risks is inherent in the portfolio?
Non-systematic - (Non-systematic risk is specific to one company and can be diversified away by diversifying a portfolio. Since the investor has put 60% of her portfolio into only two stocks, she's not diversified and is exposed to a large amount of non-systematic risk. Credit risk is typically associated with bonds and is the risk that an issuer cannot repay its interest and/or principal. Liquidity risk is the inability to sell an asset easily, which is not a concern in this portfolio since exchange-traded stocks are typically liquid. Political risk is associated with politicians making decisions that will impact an investment.)
A registered representative persuades a customer to purchase a security by assuring her that, should it fall in value, the representative will make up the difference in the account. This practice is:
Not permitted (Guaranteeing a customer against a loss is prohibited regardless of the relationship.)
When is a dividend payment made?
On the payment date- (A company will pay its shareholders a dividend on the payment date. The record date is the date that an investor must own the stock to be entitled to the dividend. The ex-dividend date is the first day that an investor can buy stock without receiving the dividend. The declaration date is the date on which the company announced that it will pay a dividend.)
If a company is utilizing statutory voting, how many votes will a common shareholder receive per vacant seat on the board?
One vote for each share that the stockholder owns -(When using the statutory voting method, a shareholder is given one vote, per share, per open seat on the board. For example, if an investor owns 1,000 shares and there are three openings on the board, she's able to cast 1,000 votes for the three open seats. If she chooses not to use all of her 1,000 votes per open seat, she cannot transfer them to another candidate. If the company utilized a cumulative voting system, a shareholder is able to multiply the number of shares owned by the number of open seats on the board. With this method, the stockholder is able to be very selective in how to cast her votes. For example, a stockholder may choose to use all of her votes on only one candidate, thereby making it more likely that her candidate will gain a seat on the board.)
The current market value of a stock is below the strike price of a call option. This situation is referred to as:
Out-of-the-money
An investor in a mutual fund:
Owns shares which represent an interest in the portfolio - (An investor in a mutual fund owns shares which represent an interest in the portfolio, but does not actually own the assets or shares that are held in the mutual fund's portfolio.)
An investor shifted the allocation of corporate bonds in his portfolio to American Depository Receipts (ADRs). As a result, he will be more exposed to:
Political risk - (ADRs are depository receipts for foreign equities. Although ADRs trade in the U.S., they are subject to the risks of investing in foreign securities. Political risk is the risk that foreign investors will lose money as a result of changes in a specific country's government or regulatory environment. Many investments are subject to liquidity risk. Credit and interest-rate risk are usually associated with bond investments.)
The type of market in which an issuer raises capital by selling its securities to investors is referred to as the:
Primary market (The type of market in which an issuer raises capital by selling its securities to investors is referred to as the primary market. The secondary market is where investors that purchased securities in the primary market then sell them to other investors. The third market involves securities that are listed on an exchange (e.g., the NYSE or Nasdaq) are traded in the OTC market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges.)
When discussing the purchase of a variable annuity with a client, the RR is not required to disclose:
Probate fees -(Probate fees and costs are associated with establishing the validity of a will, which is not a disclosure item for annuities. However, surrender, mortality, and administrative fees must be disclosed.)
A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences?
Proceeds in excess of cost are taxable as ordinary income to the beneficiary.
A broker-dealer is acting as a distribution participant in a public offering of stock. To entice customer purchases, the firm pledges to repurchase shares sold in the offering from its customers at a price that's higher than the original public offering price (POP). This type of pledge is:
Prohibited, fraudulent, and manipulative
A registered representative intends to sell interests in a private placement to her clients, but they will not be offered through her firm. If she will not be compensated for the transactions, she must:
Provide written notice to her firm
A registered representative has recently passed the Series 7 Examination. If the RR conducts business in five states, she is required to:
Register in all five states
If a customer purchases securities and fails to pay for them by the payment date, the brokerage firm will:
Sell out the securities and freeze the account
FINRA prohibits selling away and it can be best described as:
Selling securities in private transactions without prior written consent of the employing broker-dealer- (Selling away occurs when a registered representative (RR) engages in a securities transaction that's outside of the regular scope of their employment with a member firm. Recommending the services of another broker-dealer is not prohibited. Splitting commissions with another RR of the same BD is not prohibited. Advising customers to buy mutual fund shares at dollar levels just below a breakpoint is prohibited and is referred to as "breakpoint selling," not "selling away.")
An equity inverse exchange-traded fund (ETF) is most similar to:
Selling stock short
When bond issues have staggered maturity dates, they're referred to as:
Serial bonds - Bonds with staggered maturity dates are referred to as serial bonds. For serial bonds, the principal amount outstanding is reduced over time. On the other hand, term bonds have one maturity date.
A registered employee is required to disclose which of the following activities to her employing broker-dealer?
Serving as a director for a profit-based firm (Registered employees must disclose all outside business activities to their employers. Volunteering or playing sports don't require disclosure since the registered representative is not receiving compensation.)
A covered call writer can be described as being:
Short the call, and long the stock (When writing (or selling) the call, the investor is said to be short the call. A covered call writer will currently own the underlying securities, and hence be long the stock.)
When do options trades settle?
T + 1 -(Options trades typically settle within one business day (T + 1). However, if equity options are exercised, the settlement of the stock transactions occurs on the second business day (T + 2).)
The main disadvantage of 529 Prepaid Tuition Plans compared to 529 Savings Plans is that:
The account owner may lose financially if the student does not attend a public school in that state
A confirmation must be sent to a customer no later than:
The completion of the trade- (A broker-dealer must send a confirmation to a customer at or before the completion of the transaction, which is usually the settlement date.)
If a customer exceeds SIPC limits:
The customer is a general creditor
Who is responsible for creating the official statement for a municipal bond offering?
The issuer
Obtaining best execution includes all the following factors, EXCEPT:
The number of market makers for the security - (For purposes of obtaining best execution. the factors considered include price and volatility of the security, general character of the market, size and type of transaction, and the locations and accessibility of the member organization to primary markets. However, the number of market makers for the security is not a factor.)
Who keeps track of the shareholders of a mutual fund?
The transfer agent
Which of the following is TRUE if a mutual fund investor chooses to implement a systematic withdrawal plan from the fund?
The withdrawals result in a reduction of capital. - (the reduction of capital, since shares will need to eventually be redeemed to make payments. Systematic withdrawal plans provide an investor with regular payments. These payments can be structured as fixed-dollar, fixed-percentage, or fixed-time. The option chosen determines whether the payments will remain the same or whether they will cease on a specific date. Payments will first come from dividends and capital gains that are generated from the fund, but after those funds are no longer sufficient, shares will be redeemed to provide the payments.)
Which of the following descriptions characterizes leveraged exchange-traded funds (ETFs)?
They are designed to deliver a multiple of the performance of an index or other benchmark
Regulation T requires payment from a customer in how many days?
Two business days following regular-way settlement
Which of the following is subject to the LEAST amount of credit risk?
U.S. Treasury bonds- (Credit risk, also referred to as default risk, is the risk that a bond issuer will not make interest and/or principal payments on its bonds. Since U.S. Treasury bonds are backed by the U.S. government, they are considered to have no credit risk.)
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be:
U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price: Step 1: 105.24 is equal to 105 24/32 Step 2: convert 24/32 into a decimal, which is .75 Step 3: convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay $1,057.50.
What's the maximum profit for the buyer of a call option?
Unlimited (The maximum gain for the buyer of a call option is unlimited. A buyer of a call option will realize a profit if the underlying stock rises above the breakeven point. Since a stock's increase is unlimited, so too is the potential profit for the buyer of a call. On the other hand, if the stock doesn't rise and instead falls below the strike price (i.e., the option is out-of-the-money), the buyer's maximum loss is the premium paid.)
When is an underwriting broker-dealer able to accept payment from an investor for the purchase of a new issue?
When the registration is declared effective. (Broker-dealers can only accept payment for a new issue after a security's registration is declared effective. The red herring is also referred to as the preliminary prospectus and is given to investors before the effective date. The cooling-off period lasts between the date on which an issuer files its registration statement with the SEC and the effective date of the offering. During the cooling-off period, no sales can be confirmed and no payment can be accepted.)
In judging the fairness of a firm's markup, industry rules would NOT consider:
Whether the client was a retail or institutional customer Among the relevant factors that a member may consider in determining a fair markup or commission are the following. -The type of security involved (Common stock would normally demand a higher markup than debt.) -The availability of the security in the market (actively or inactively traded) -The price of the security The amount of money involved in the transaction -Disclosure (made prior to the execution of the transaction may be relevant) -The pattern of markups -The nature of the member firm's business (What type of services does the member provide to the customer?) -The type of client is not specifically mentioned in the rules as determining whether the markup or commission is fair and reasonable.
