SIE Practice Questions
What's the max annual amount a customer can contribute to an IRA?
$6,000 * BUT, if you're 50 or older, you can contribute $7,000
Current Yield
= annual interest or dividend payments / bond or stock CURRENT market price *it gives a measurement of what the investor can expect to make in a years time
Direct Partnership Program (DPP)
A direct participation program (DPP) is a pooled entity that offers investors access to a business venture's cash flow and tax benefits
Section 529 Savings Plan
A state-sponsored investment fund that has tax advantages under the Internal Revenue Code. Distributions are used to pay education expenses. The securities issued under these plans are technically municipal securities and the broker-dealers selling them are subject to MSRB regulation.
Which of the following investments is the MOST suitable for a person who is interested in aggressive growth? 1) Common Stock 2) High-Yield Bond Fund 3) Preferred Stock 4) High-rated Bond
A: 1) Common Stock *Of the choices listed, common stock has historically provided the greatest potential for growth *Bonds and preferred stock are typically suitable for investors who are seeking income.
Which of the following statements is TRUE concerning electronic communication networks (ECNs)? 1) They can be used only by retail investors. 2) They can be used by investors who want to trade anonymously. 3) They can be used only by institutional investors. 4) They can be used by clients who don't want to use a broker-dealer.
A: 2) ECNs can be used by investors who want to trade anonymously * can be used both by institutional & retail investors * designed to anonymously match buyers w sellers * immediate automatic execution if a matching buy or sell order can be found on the system *
Which of the following organizations enforces municipal securities regulations for broker-dealers? 1) The FRB 2) The FDIC 3) FINRA 4) The MSRB
A: 3) FINRA * Although the MSRB creates rules GOVERNING municipal securities broker-dealers, its rules are ENFORCED by other regulatory bodies. The appropriate regulatory agencies are the: The SEC or FINRA for broker-dealers The comptroller of the currency for federal banks The FRB for state banks that are members of the FRB The FDIC for member banks of the FDIC
When purchasing Treasury notes, an investor should understand: 1) Delivery is in either book entry or physical form 2) Interest is paid at maturity 3) Interest is paid semi-annually 4) Principal is adjusted for inflation
A: 3) interest is paid semi-annually *Treasury notes and bonds pay interest semi-annually. *Treasury securities are only issued in book entry form *Treasury Inflation Protected Securities (TIPS) are adjusted for inflation.
A company has a noncumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year, but will be paid this year, how much will the preferred stockholder receive? a) $5 b) $10 c) $15 d) $20
A: a) $5 * The preferred stock is noncumulative, which means that if the dividend is not paid, it does not accumulate to the next year. Therefore, the preferred stockholder will receive only $5 for this year.
The market price of ABC Corporation common stock is $56 and its quarterly dividend is $0.75. What is the stock's current yield? a) 0.0536 b) 0.0134 c) 0.026 d) 0.068
A: a) 0.0536 or 5.36% * pay attention to the fact that you're calculating CURRENT yield, which requires ANNUAL dividend or coupon payment / stock or bond price
A convertible bond has a conversion price of $40 and is currently selling in the market at $950. The conversion ratio is: a) 25 b) 23.75 c) 40 d) 38
A: a) 25 *To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($40). In this question, the conversion ratio is $25 ($1,000 ÷ $40). To calculate the conversion ratio, the market price of the bond is irrelevant.
A 529A or ABLE account is permitted for which of the following persons? a) A person who is disabled b) A person who is saving for college c) A person who meets the definition of low-income d) A person who is a minor
A: a) A person who is disabled * Similar to 529 college savings plans, 529 ABLE (or simply referred to as 529A) accounts are savings accounts that are created and administered by states under the Achieving a Better Life Experience (ABLE) Act. These accounts are designed to supplement the support of persons who are disabled or who meet the government's definition of disabled and are receiving Social Security disability, Medicaid, or private insurance payments.
Which of the following statements is TRUE if interest rates rise? a) Both bond and bond fund prices will fall. b) Bond prices will rise, but bond fund prices will fall. c) Both bond and bond fund prices will rise. d) Bond prices will fall, but bond fund prices will rise.
A: a) Both bond and price fund prices will fall * Bond prices and interest rates move in the opposite direction. When interest rates rise, bond prices will fall and vice versa. Bond funds are simply mutual funds that invest in bonds. Bond fund prices will also move in the opposite direction as interest rates fluctuate.
The FDIC provides coverage for: a) Certificates of deposit (CDs) b) Fixed annuities c) Life insurance d) Variable annuities
A: a) Certificates of deposit (CDs) *The Federal Deposit Insurance Corporation (FDIC) provides coverage for deposits at a bank, in the event the bank has financial troubles. FDIC will cover CDs, but not insurance, or fixed and variable annuities.
When selling limited partnership interests, a registered representative is NOT required to: a) Certify that the customer is an institution b) Ensure that she has disclosed to the customer the investment's lack of liquidity c) Ensure that the customer has a net worth to sustain a total loss of the investment d) Ensure that the limited partnership investment is suitable for the customer
A: a) Certify that the customer is an institution *When selling limited partnership interests, a registered representative is required to ensure that she informed the customer of all relevant facts relating to the investment's lack of marketability and liquidity. In addition, after obtaining information about the customer's investment objectives, financial and tax status, other investments, and future financial needs, the RR must have reasonable grounds to believe the customer has sufficient net worth and income to lose his entire investment, or has other liquid assets. The RR must certify that the customer is suitable and is in a financial position to be investing in limited partnership interests. However, there is no requirement to certify that the customer is an institutional investor. Keep in mind, there is a difference between an accredited investor (e.g., a person who has net worth of at least $1,000,000 or annual income of at least $200,000), which is defined under Regulation D, and an institutional investor (a financial institution or an account with at least $50 million of invested assets), which is defined by FINRA.
If no time is specified on a limit order, it will be cancelled if it's not executed by the end of the: a) Day b) Week c) Month d) Next trading day
A: a) Day
A brokerage firm purchases 600 shares of stock from a customer and places the securities into its inventory. In this case, the firm likely acted as a(n): a) Dealer b) Designated market maker c) Agent d) Underwriter
A: a) Dealer * When a broker-dealer buys a security from a customer by using its own funds and places the securities into its inventory, it has acted as a dealer (principal). In this situation, the customer is charged a markdown on the transaction. --> If the firm bought the security for a customer or sold a security to a customer without being the other side of the transaction, it would be acting as a broker (agent) and it would charge the customer a commission. --> An underwriter assists an issuer in raising capital in the primary market by purchasing the securities from the issuer and selling them to customers. The firm that controls trading on an exchange for a specific stock is referred to as a designated market maker (DMM).
An individual is short XYZ stock. Which of the following options will provide him with protection? a) Long an XYZ call b) Long an XYZ put c) Short an XYZ call d) Short an XYZ put
A: a) Long an XYZ call *An individual who sells stock short is betting that the stock will decline in value. However, if the stock's value increases, the investor is subject to unlimited upside risk since the stock will need to be purchased in the market to cover the short position. Buying a call will allow the investor, at worse, to break even because it allows them to buy back the stock at the same price if the market increases.
Preemptive rights give a stockholder the right to: a) Maintain his proportionate interest in the corporation b) Purchase warrants c) Serve as a director d) Purchase bonds
A: a) Maintain his proportionate interest in the corporation *A stockholder's preemptive right gives the stockholder the right to maintain his proportionate interest in the corporation. For example, if a shareholder owns 1% of the corporation's common stock, and the corporation intends to issue additional shares, preemptive rights would give that shareholder the option of purchasing 1% of the new shares.
If an investor wants to build a bond portfolio that maintains a stable value, she should purchase bonds with: a) Short maturities b) Long maturities c) A combination of long and short maturities d) Zero coupons
A: a) Short Maturities * Although short-term bonds are influenced by changing interest rates, the effect is relatively minor due to their short-term nature. For that reason, investors who want stability in their bond portfolios should invest in short-term debt
The federal securities regulation that provides rules for the secondary market is: a) The Securities Exchange Act of 1934 b) The Investment Advisers Act of 1940 c) The Securities Act of 1933 d) The Securities Investor Protection Act of 1970
A: a) The Securities Exchange Act of 1934 * The Securities Exchange Act of 1934 establishes the rules for activities that are conducted in the secondary market. The two most recognized secondary markets are the New York Stock Exchange (NYSE) and Nasdaq. The Act of 1934 created the Securities and Exchange Commission (SEC) and gave it preeminent regulatory authority over domestic securities dealings in both the primary and secondary markets.
A customer purchased a premium bond which gives the issuer the ability to redeem the entire issue prior to maturity. Which yield is MOST relevant? a) Yield-to-call b) Yield-to-maturity c) Current yield d) Nominal yield
A: a) Yield-to-Call *The yield-to-call (YTC) represents a bond's yield if it is called or redeemed prior to maturity; however, the yield-to-maturity (YTM) represents the bond's true yield if it is held to maturity. Since a premium bond's YTC is lower than its YTM, the YTC must be used when quoting the yield to a customer. A bond's nominal yield is its coupon rate or annual return, while a bond's current yield measures what the investor will receive each year based on her (potential) purchase price.
Shares of a closed-end fund are available on the NYSE at $21.50 per share. The customer will pay: a) $21.50 + a sales charge b) $21.50 + a commission c) $21.50 with no commission or sales charge d) $21.50 less a commission
A: b) $21.50 + a commission *The key to this question is in recognizing that the customer is buying shares of a closed-end fund. Closed-end fund shares are exchange-traded securities and are purchased with commissions or sold less a commission. On the other hand, shares of open-end companies (mutual funds) trade for their NAV plus any applicable sales charges. The NAV + sales charge is considered the mutual fund's public offering price (POP).
A hedge fund is: a) A mutual fund designed for accredited investors b) A private investment fund designed for wealthy, sophisticated investors c) A type of private placement variable life insurance d) Another name for a balanced fund
A: b) A private investment fund designed for wealthy sophisticated investors * Hedge funds are private investment pools designed for wealthy, sophisticated investors. Accredited investors include wealthy, sophisticated individuals but hedge funds are not mutual funds.
A hedge fund would NOT be a suitable investment for an investor seeking to: a) Invest in markets outside the U.S. b) Access her funds c) Invest in securities in a specific industry d) Invest in derivatives
A: b) Access her funds *Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. They are suitable for an investor seeking the other choices listed.
A fund which invests in companies that pay high dividends is: a) A growth fund b) An equity income fund c) A sector fund d) A no-load fund
A: b) An equity income fund *A mutual fund investor who is most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase an equity income fund. --> A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors who are seeking capital gains will most likely purchase a growth fund. --> A no-load fund is an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains. --> A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.
What is the market outlook for the sellers of call options? a) Bullish b) Bearish c) Neutral d) Volatility
A: b) Bearish * Sellers of call options are bearish (i.e., they want the value of the underlying stock to fall) --> you're selling a call if you think the market will go down (low market conditions = bearish)
When a bond is called, the bondholder receives the: a) Call price b) Call price plus accrued interest c) Market price d) Market price plus accrued interest
A: b) Call price + accrued interest
Which of the following statements is TRUE regarding contributions to a 401(k) plan? a) Contributions are in after-tax dollars. b) Employee participants should be aware of the risk of investing too much in their employer's stock. c) The employer determines the investments into which the contributions are allocated. d) Contributions of an unlimited amount can be made by employees.
A: b) Employee participants should be aware of the risk of investing too much in their employer's stock * Employee participants should be aware of the risk of investing too much in their employer's stock. If the stock performs below expectations, a significant decline could be exhibited in the amount available for retirement. --> Contributions are made in pre-tax dollars and there is a limit to the amount that can be contributed annually. --> The employee determines the allocation of contributions from a list of investment options selected by the employer. The employer does not determine the investments into which the contributions are allocated.
The major disadvantage to a limited partner in a direct participation program (DPP) is: a) Correlation to the stock market b) Lack of liquidity c) Flow through of income and expense d) Limited liability
A: b) Lack of liquidity *A limited partnership is a type of DPP. An investor has limited control (management) in equity investments and no control (management) in bond or DPP investments. The major disadvantage of a DPP is the lack of liquidity meaning that the investor cannot easily sell his portion of ownership.
The Bond Buyer Index is based on which of the following securities? a) Treasury bonds b) Municipal bonds c) Corporate bonds d) Mortgage bonds
A: b) Municipal Bonds * Municipal bond indices are created by The Bond Buyer. The Bond Buyer is a financial publication that specializes in the municipal market.
When an investor sells her mutual fund shares back to the fund, she is assessed a fee which is returned to the fund. The fee is referred to as which of the following? a) 12b-1 fee b) Redemption fee c) Contingent deferred sales charge d) Back-end load
A: b) Redemption fee *When mutual fund shares are redeemed, some funds deduct a small redemption fee from the amount that's paid to the investor. This fee is returned to the fund's portfolio and is not considered compensation to a salesperson. The purpose of the fee is to discourage investors from redeeming their shares too quickly. Some funds allow investors to buy shares at the NAV and will then assess a sales charge when the investors redeem their shares. Usually, the longer an investor owns the shares, the greater the reduction in the sales charge. Due to the decreasing charge, this form of load is referred to as a back-end load or a contingent deferred sales charge (CDSC)
The member of a limited partnership who assumes liability for the debts of the entity and is usually concerned with its overall management is the: a) General partner b) Senior limited partner c) Management committee which is chosen by the limited partners d) Syndicator
A: b) Senior Limited Partner *The general partner is the member of the limited partnership who assumes liability for the debts of the entity and is usually concerned with its overall management.
What type of bond would MOST likely be secured by an excise tax, cigarette tax, or gasoline tax? a) GO bond b) Special tax bond c) Double-barreled bond d) Special assessment bond
A: b) Special Tax Bond *A special tax bond is a type of revenue bond and is usually financed by a tax on certain items such as cigarettes, liquor, or gasoline (excise taxes).
Which of the following choices does NOT hold customer cash or securities? a) A broker-dealer that maintains omnibus accounts b) The Depository Trust Company c) A prime broker d) A broker-dealer
A: b) The Depository Trust Company *The Depository Trust Company (DTC) is a securities depository and national clearinghouse for the settlement of trades. The DTC holds broker-dealer (not customer) funds and securities in the name of member firms. --> An omnibus broker-dealer carries customer accounts, which means that it holds customer funds and securities. --> A prime broker performs centralized clearing and account maintenance functions for customers (often institutional) that execute transactions through several other broker-dealers. --> A broker-dealer carries customer accounts and receives or holds funds and securities.
Which of the following is controlled by the Federal Reserve Board (FRB)? a) Interest rates on bank deposit b) The discount rate c) Insurance on deposits that are held at a financial services firm d) Trading regulations on U.S. government securities
A: b) The discount rate *The FRB controls or sets the discount rate. The discount rate is what the FRB charges its member banks on short-term loans. Any adjustments it makes to the discount rate will influence the fed funds rate, which is the rate that member banks charge one another on overnight loans.
What is the breakeven point for the buyer of a call option? a) The strike price minus the premium b) The strike price plus the premium c) The strike price d) The market price plus the premium
A: b) The strike price plus the premium *The holder (purchaser) of a call expects the market price of the underlying security to rise and therefore will profit from a rise in the security. The breakeven point for the buyer of a call option is the strike (exercise) price plus the premium. For example, a customer who purchases an XAM June 40 call at 3 would break even if XAM was trading at $43. The breakeven point for the buyer of a put option is the strike price minus the premium.
A type of bond in which the amount of interest paid to the investor may change is referred to as a: a) Convertible bond b) Variable rate bond c) Zero-coupon bond d) Callable bond
A: b) Variable rate bond * For most bonds, the interest rate or payment is set at the time of issuance and generally remains fixed for the life of the bond. However, in some cases, as interest rates move up or down, the coupon rate will be adjusted to reflect market conditions. These adjustable rate bonds are sometimes referred to as variable or floating rate securities. --> A zero-coupon bond is one that makes no periodic interest payments during its life. --> A convertible bond gives an investor the ability to convert the par value of the bond into predetermined number of shares of the company's common stock; however, the bond's interest payment is fixed.
The shares of a closed-end fund that trades on the NYSE has a current price of $21.70. A customer who purchases the shares will pay: a) $21.50 plus a commission b) $21.50 plus a sales charge c) $21.70 plus a commission d) $21.70 plus a sales charge
A: c) $21.70 plus a commission * closed-end funds charge a commission --> open-end funds have a sales charge
What is the maximum coverage afforded to an investor under SIPC? a) $500,000 per account b)$250,000 per account c) $500,000 per separate customer of which $250,000 may be cash d) $500,000 per separate customer and $250,000 in cash
A: c) $500,000 per separate customer of which $250,000 may be cash * SIPC protects customers in the case of a brokerage firm's bankruptcy. The maximum coverage afforded to an investor under SIPC is $500,000 per separate customer of which $250,000 may be for cash.
A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is: a) $950.87 b) $952.80 c) $958.75 d) $9,587.50
A: c) $958.75 *U.S. government bonds are quoted as a percentage of par with a fraction in 32nds of a point. Therefore, a T-bond quoted at 95.28 is equal to 95 28/32. By converting the fraction to a decimal, the quote becomes which is 95.875% of the par value of $1,000. $1,000 x 95.875% = $958.75.
A bond with a 4% coupon is priced at a 3.20 basis. If the bond's yield-to-maturity decreased by 10 basis points, the yield would be: a) 3.90% b) 3.30% c) 4.10% d) 3.10%
A: c) 3.10% *If a bond is priced at a 3.20 basis, this means that it is priced to yield 3.20 or has a YTM of 3.20%. If the bond's basis decreased by 10 basis points, the new yield-to-maturity is 3.10%. The fact that the bond has a 4% coupon rate is relevant for determining whether the bond is trading at a premium or discount to par value. Since the bond's YTM is less than 4%, the bond is trading at a premium.
A bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield-to-maturity increases by 40 basis points, the yield would be: a) 5.60% b) 6.40% c) 7.60% d) 6.80%
A: c) 7.6% If a bond is priced at a 7.20 basis, this means that it is priced to yield 7.20 or has a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield-to-maturity is 7.60%. The fact that the bond has a 6% coupon rate is relevant for determining whether the bond is trading at a premium or discount to par value. Since the YTM is greater than 6%, the bond is trading at a discount.
If a bond has a basis of 4.35 and a coupon rate of 4.95%, the bond is selling at: a) A discount b) Par value c) A premium d) A price that cannot be determined from the information given
A: c) A premium * Bonds may be quoted based on their yield-to-maturity, which in this example is 4.35 (basis and YTM are synonymous). Since the bond has a yield-to-maturity (basis) of 4.35%, which is lower than the 4.95% nominal yield (coupon rate), the bond is selling at a price that is above the par value of $1,000 (i.e., a premium). On the other hand, if the yield-to-maturity was higher than the nominal yield, the bond would be selling at a discount. Basis = YTM Coupon Rate = Nominal Yield
A financial services firm that charges customers based on a percentage of the assets under management is BEST defined as: a) An institutional investor b) A broker-dealer c) An investment adviser d) An exchange
A: c) An investment advisor *Investment advisers charge fees for providing advice to their clients. These fees are often based on a percentage of assets under management (AUM) and are charged regardless of whether any trades occurred in their clients' accounts. --> Broker-dealers earn compensation (e.g., commissions) for executing transactions --> an exchange is a facility that brings together the buyers and sellers of securities.
Which of the following terms is NOT associated with a variable annuity? a) Surrender charge b) Death benefit c) Commission d) Sales charge
A: c) Commission *The term commission is associated with buying and selling individual securities, not annuities. --> On the other hand, the term sales charge or load is associated with buying or redeeming units of a variable annuity or shares of a mutual fund.
Which of the following statements is TRUE regarding preemptive rights? a) Both common and preferred stockholders receive rights. b) Neither common nor preferred stockholders receive rights. c) Common stockholders receive rights. d) Preferred stockholders receive rights.
A: c) Common Stockholders receive rights * A corporation's existing common stockholders are entitled to preemptive rights, not its preferred stockholders.
All of the following statements are TRUE of 529 plans, EXCEPT: a) Withdrawals that are used for educational purposes are not subject to federal taxation. b) There are no income limits placed on contributors. c) Contributions are unlimited. d) A married couple may make a lump-sum contribution of $150,000 without incurring federal gift taxes.
A: c) Contributions are unlimited * Although the contribution limits for a 529 plan are quite high, they are not unlimited. Each state establishes the maximum amount that may be contributed to all 529 plans maintained for one beneficiary. All of the other statements are correct. However, it's important to note that an investor who contributes the maximum amount allowable to a 529 plan may incur federal gift taxes.
Which of the following government agencies is NOT involved in the housing market? a) Federal National Mortgage Association (FNMA) b) Federal Home Loan Mortgage Corporation (FHLMC) c) Federal Home Loan Banks (FHLB) d) Government National Mortgage Association (GNMA)
A: c) Federal Home Loan Banks (FHLB) * The Federal Home Loan Banks are not involved in the housing market. Instead, the FHLB provides liquidity to savings and loan institutions by lending them money if/when they are in need of funds.
The purpose of a depository facility is to: a) Clear transactions in equity securities b) Clear transactions in fixed-income securities c) Hold securities in book-entry form d) Ensure that dividend payments are sent to investors by the issuers of the securities
A: c) Hold securities in book-entry form * The Depository Trust Corporation (DTC) is a subsidiary of the Depository Trust & Clearing Corporation (DTCC) and its primary function is to hold securities in book-entry form. This allows broker-dealers to buy and sell securities on behalf of their customers without the costs and time associated with physical certificates. A change of ownership is made from the account of the selling broker-dealer to the account of the buying broker-dealer. The DTC is not a clearing facility.
Which of the following statements is NOT TRUE regarding the characteristics of options and warrants? a) Warrants are created by the corporation whose stock underlies the instrument; options are created by contract between an option buyer and an option writer. b) Both options and warrants can expire worthless if they are not exercised. c) If options are exercised, a set price must be paid for the underlying security; if warrants are exercised, the securities are received at no additional cost. d) Both options and warrants can be bought and sold in the secondary market.
A: c) If options are exercised, a set price must be paid for the underlying security; if warrants are exercised, the securities are received at no additional cost. * Both options and warrants have a strike price—if exercised, the transactions for the underlying security will occur at that set price. It is in the case of convertible bonds or preferred stock that investors can convert the security into the underlying stock with no additional payment of money. All other statements are true.
A bond is selling at a premium. This indicates that: a) The yield to maturity is greater than the nominal yield b) The market price is less than the par value c) Interest rates have decreased since the bond was issued d) The nominal yield is less than the current yield
A: c) Interest rates have decreased since the bond was issued *The amount that the market price exceeds the par value is known as a premium. One reason for selling at a premium is a decrease in interest rates after the bonds were issued. When looking at the yields for premium bonds: 1) nominal yield is the highest 2) current yield 3) yield to maturity
An advantage a corporation receives when it issues a convertible bond is that: a) It's able to offer bonds with a higher rate of interest to investors b) It's able to offer bonds with a longer maturity to investors c) It's able to borrow money at a lower rate of interest d) It's able reduce the number of shares that it has outstanding
A: c) It's able to borrow money at a lower rate of interest *Convertible bonds allow corporations to borrow money at a lower rate of interest (lower coupon) since the convertible feature is an attraction for investors. Investors are willing to accept the lower interest rate in exchange for the opportunity to convert the bonds into common stock. In addition, the investor has some downside protection because, even if the price of the stock falls, the convertible bond still has inherent value as a bond.
Which of the following regulates the resale of restricted securities? a) Rule 147 b) Regulation D c) Rule 144 d) Rule 145
A: c) Rule 144 * Rule 144 and 144A regulate the process by which restricted (unregistered) securities may be resold. --> Regulation D sets the regulations for raising capital through private placements --> Rule 147/147A establish the requirements for intrastate offerings --> Rule 145 establishes the registration requirements for the reclassification of securities
Which of the following objectives is the least suitable reason for investing in a mutual fund? a) Diversification b) Professional management c) Short-term trading d) Liquidity
A: c) Short-term trading * Investors in mutual funds receive: 1) Diversification 2) Professional Management 3) Liquidity
A vote of the common shareholders is required for a corporation to declare a: a) Cash dividend b) Stock dividend c) Stock split d) Stock buyback
A: c) Stock split *A vote of the common shareholders is required for a corporation to declare a stock split. Shareholder approval is not required for cash and stock dividends, which are decided by the board of directors. A stock buyback would also be decided by the board of directors.
State securities laws are also referred to as: a) Self-regulatory rules b) The Investment Company Act of 1940 c) The Blue Sky laws d) The Securities Exchange Act of 1934
A: c) The Blue Sky Laws * State securities laws are also referred to as the "Blue Sky laws." The Securities Exchange Act of 1934 and the Investment Company Act of 1940 are both federal securities laws. Self-regulating organizations (e.g., FINRA) can create rules and regulations for their members, but they don't apply to individuals and firms that are outside of their industry.
Which of the following choices best describes the price that a mutual fund investor receives when she redeems her shares? a) The bid price of the previous day's close b) The current offering price c) The next computed bid price on the day that the shares are redeemed d) The next computed asked price on the day that the shares are redeemed
A: c) The next computed bid price on the day that the shares are redeemed * A mutual fund investor who redeems her fund shares will receive the next computed bid price on the day that the shares are redeemed.
If an options contract is exercised, which of the following statements is TRUE? a) The buyer of a call must deliver the underlying stock b) The buyer of a put will receive the underlying stock c) The seller of a put will be required to buy stock d) The seller of a call will lose the premium
A: c) The seller of a put will be required to buy stock *If a put option is exercised, the buyer has the right to put (deliver) the underlying stock to the seller at an agreed-upon price. The seller or writer has the obligation to accept delivery of the stock at the exercise or strike price.
Which bonds are considered the most liquid? a) Corporate bonds b) Municipal bonds c) Treasury bonds d) Mortgage bonds
A: c) Treasury Bonds * Liquidity represents the ability to buy and sell a stock or bond quickly. Since the U.S. Treasury is one of the largest issuers in the world, T-Bonds are extremely liquid with a significant number of buyers and sellers. Corporate bonds and municipal bond issuers are smaller than the U.S. government and their bonds will have less liquidity.
Which of the following securities trades in fractional units of 1/32 of a point? a) Convertible bonds b) Municipal bonds c) Treasury bonds d) Corporate bonds
A: c) Treasury Bonds *Treasury notes and Treasury bonds trade in increments of 1/32 of a point *Corporate and municipal bonds trade in increments of 1/8 of a point (A convertible bond is a type of corporate bond)
Which of the following is defined as an investment company? a) Hedge fund b) Private equity fund c) Unit investment trust (UIT) d) Real estate investment trust (REIT)
A: c) Unit investment trust (UIT) *Unit investment trusts, face amount certificates, and management companies (open-end and closed-end) are defined as investment companies. --> Although hedge funds, private equity funds, and REITs have characteristics that are similar to investment companies, they are not investment companies.
An annuitant is receiving payments from a variable annuity and, at the time of his death, his beneficiary receives a lump-sum payment. The annuity payout option is: a) Straight life annuity b) Joint and last survivor life annuity c) Unit refund life annuity d) Straight life annuity with period certain
A: c) Unit refund life annuity *The annuity payout option that provides the beneficiary with a lump-sum payment at the time of the annuitant's death (which reflects the value of the remaining annuity units) is referred to as a unit refund life annuity.
John Trask, one of your customers, is long 100 shares of Plantation, Inc. 6% cumulative preferred stock ($100 par). Over the last three years, Plantation, Inc. has had negative net income and Mr. Trask hasn't received any dividends during that time period. How much must Mr. Trask receive in dividend income this year before common stockholders can receive a cash dividend? a) $6 b) $24 c) $600 d) $2,400
A: d) $2,400 * Even though the stated dividend is 6%, the Board of Directors must still declare it. Without sufficient earnings for the previous three years, the dividend could not be paid and therefore no common dividends could be paid. Currently, there is $1,800 (6% x $100 par x 100 preferred shares x three years) of preferred dividends in arrears that must be paid to Mr. Trask before a dividend can be paid to common shareholders. Add the $600 that Mr. Trask would need to be paid for this year to the $1,800 from past years and $2,400 must be paid to him before a common dividend can be paid.
A 5% $1,000 par value bond sells at $900 and is maturing in 10 years. What is the amount of interest per year? a) $10 b) $40 c) $45 d) $50
A: d) $50 * Interest payment amount is always calculated as the coupon rate times par value regardless of if the bond sells at a premium or discount
What is the typical maturity for an ETN? a) 180 days or less b) 270 days or less c) 1 year d) 10 to 30 years
A: d) 10 to 30 years * Exchange-traded notes (ETNs) are long-term securities which typically have maturities between 10 and 30 years.
A REIT will receive preferential tax treatment if it distributes at least what percentage of its income to shareholders? a) 10% b) 20% c) 75% d) 90%
A: d) 90% *If an REIT distributes at least 90% of its ordinary income to shareholders, the income will only be taxed once (at the investors' level).
If a stock is sold before the ex-dividend date, but delivered after the record date, it must be accompanied by: a) A letter from the transfer agent b) The signature of the owner of the stock c) A power of attorney d) A due bill
A: d) A due bill *When the selling party delivers a security after the date on which the new owner is entitled to receive a cash dividend, the seller must deliver the security with a due bill attached. The due bill recognizes that the buyer is owed the dividend.
The earnings in Section 529 Savings Plans: a) Are taxable in the year in which they are earned b) Are taxable to the account owner when distributions are made c) Must be distributed and taxed to the beneficiary each year d) Accumulate on a tax-deferred basis as long as the money stays in the plan
A: d) Accumulate on a tax-deferred basis as long as the money stays in the plan The earnings generated from the investments in a Section 529 Savings Plan accumulate on a tax-deferred basis as long as the money remains in the plan. Qualified withdrawals that are used for higher education expenses will not be subject to federal taxes.
A common shareholder is not entitled to: a) Vote for the board of directors b) Receive dividends if voted for by the board of directors c) Give or sell shares to anyone she wishes d) Appoint officers of the corporation
A: d) Appoint officers to the corporation
An issuer includes warrants with a bond offering that it's conducting. This is done to: a) Eliminate the dilution of its stock b) Increase the value of its stock c) Increase the yield on the bonds d) Decrease the coupon rate on the bonds
A: d) Decrease the coupon rate on the bonds * Warrants are generally considered a "sweetener," which gives holders the ability to purchase stock at a predetermined price for a long period. When issued with bonds, the issuer can typically lower the coupon rate and reduce its interest cost.
If an investor expects a sharp increase in a stock's price, which of the following will be the most profitable? a) Sell puts b) Buy puts c) Sell calls d) Exercise rights
A: d) Exercise Rights *Exercising preemptive rights, similar to exercising long call options, will provide investors with an unlimited potential gain if the price of the underlying stock rises. --> If investors expect a stock's price to rise, selling puts will provide a profit, but maximum profit is limited to the premium received on the sale of the puts. --> Buying puts and selling calls are both bearish positions and are only profitable if the underlying stock's price falls.
A client is interested in determining the expense ratio of a mutual fund. Which of the following actions is the MOST appropriate for a registered person to take? a) Instruct the client that the information can be obtained from FINRA b) Refer the client to the fund's sponsor since the RR may not be authorized to release this information c) Instruct the client that the information can be obtained from the SEC database of mutual fund prospectuses d) Inform the client that this information can be obtained by reviewing the front of the fund's
A: d) Inform the client that this information can be obtained by reviewing the front of the fund's *The front of a mutual funds prospectus is required to provide a standardized table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. The ratio is determined by dividing total expenses by the average net assets in the portfolio.
What organization acts as the counter-party in all option contracts and provides guarantees in option trading? a) Options Guarantee Association b) Options Guarantee Society c) Options Clearinghouse Organization d) Options Clearing Corporation
A: d) Options Clearing Corporation *The Options Clearing Corporation removes counter-party risk by guaranteeing the exercise of all option contracts.
Southern California Gas is issuing 5 3/4% first mortgage bonds at a price of 96.35% of their par value. The payment of interest and principal on the bond is secured by: a) Revenue from the Southern California Gas company b) The mortgages on property owned by the state of California c) The state of California d) Property owned by Southern California Gas
A: d) Property owned by Southern California Gas * The bonds are first mortgage bonds, which means they are secured by property that is owned by the Southern California Gas Company. Since the company is publicly owned, the bonds are not secured by property that is owned by the state of California.
Two years ago, an investor bought mutual fund shares. Today, if the investor intends to purchase additional shares, she can obtain a reduced sales charge by using: a) A letter of intent b) Dividend reinvestment c) Dollar cost averaging d) Rights of accumulation
A: d) Rights of accumulation * The rights of accumulation provision gives investors the ability to receive cumulative quantity discounts when purchasing additional mutual fund shares. Under the rights of accumulation provision, rather than using the original purchase price, the current market value of the investment plus any additional investments is used to determine the applicable sales charge. Once a breakpoint is reached, all future purchases qualify for the reduced sales charge. --> On the other hand, a letter of intent qualifies an investor for a discount that's made available through breakpoints without initially depositing the entire amount required.
Interest on U.S. Treasury securities is: a) Subject to federal and state income tax b) Exempt from federal and state income tax c) Subject to state income tax, but exempt from federal income tax d) Subject to federal income tax, but exempt from state income tax
A: d) Subject to federal income tax, but exempt from state income tax * Interest on U.S. Treasury securities is subject to federal income tax, but exempt from state income tax. This is the opposite of the tax treatment on municipal (state) bond interest, which may be subject to state tax, but is exempt from federal tax.
Which of the following features applies to a variable annuity, but not to a mutual fund? a) Sales charge b) Management fees c) Administrative expenses d) Surrender charge
A: d) Surrender Charge * A person who invests in an annuity may cancel (surrender) his variable annuity at any time during the accumulation period and receive the annuity's current value. A disadvantage is that the person may be required to pay surrender charges that are determined by how long he has held the annuity.
Who creates the Options Disclosure Document? a) The SEC b) FINRA c) Each broker-dealer d) The OCC
A: d) The OCC *The Options Disclosure Document that's provided to options clients is created by the Options Clearing Corporation (OCC).
A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client? a) The customer will not be able to diversify his assets b) The customer will not be able to switch mutual funds within each family c) The customer will not be able to receive a single account statement d) The customer will not be able to receive sales breakpoints
A: d) The customer will not be able to receive sales breakpoints *The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds. The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). --> The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer.
A decrease in which of the following would cause the price of a bond to increase? a) The bond's rating b) The bond's liquidity c) The issuer's financial strength d) The general level of interest rates
A: d) The general level of interest rates *Interest rates and bond prices are inversely related. When interest rates increase, bond prices will fall. When interest rates decrease, bond prices will rise. A decrease in a bond's rating choice (a), a bond's liquidity choice(b), or an issuer's financial strength choice (c), would usually have a negative effect on a bond's price.
If a municipal bond is backed by the revenues of a facility and the income is insufficient to make the debt service payment, which of the following statements is TRUE? a) The bond's indenture will need to be amended. b) The bond's interest rate will increase. c) The issuer is required to close the facility. d) The issuer will default on its next payment.
A: d) The issuer will default on its next payment. *A municipal bond that's backed by revenues of a project or facility is referred to as a revenue bond. When the income is insufficient to make the debt service payments (i.e., interest and/or principal payments), the issuer will default on that bond.
Which of the following sources of revenue is NOT used to pay the debt service on general obligation bonds? a) Income taxes b) Property taxes c) Licensing fees and traffic fines d) Tolls collected at a tunnel located in the municipality
A: d) Tolls collected at a tunnel located in the municipality *A general obligation (GO) bond is backed by the full faith and credit of the municipality. Items that may be used to pay the debt service on GO bonds include fines, sales taxes, property taxes, income taxes, and licensing fees. --> Items such as tolls, concessions, and lease rental payments would be used to back a revenue bond.
The fourth market is BEST defined as: a) Exchange-listed securities trading in the OTC market b) Unlisted securities trading on regional exchanges c) Unlisted securities trading in the OTC market d) Trading directly between institutional investors
A: d) Trading directly between institutional investors
As far as variable annuities are concerned, which of the following statements is TRUE? a) The investment risk is borne by the insurance company as in a fixed annuity b) Payments of a variable annuity can be decreased because of an increase in the expenses of the insurance company c) CRRs selling variable annuities are not required to register with the SEC or FINRA d) Variable annuity non-qualified separate accounts are registered under the Investment Company Act of 1940
A: d) Variable annuity non-qualified separate accounts are registered under the Investment Company Act of 1940 *The only true statement listed concerning variable annuities is variable annuity non-qualified separate accounts (the mutual fund portion) are registered under the Investment Company Act of 1940. The investment risk (fluctuation in the market value of the separate account) is borne by the annuity owner, not by the insurance company as in the case of a fixed annuity. Payments of a variable annuity cannot be decreased because of an increase in the expenses of the insurance company. RRs selling variable annuities are required to register with the SEC and FINRA.
While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a: a) Fixed number of annuity units b) Fixed number of accumulation units c) Varying number of annuity units d) Varying number of accumulation units
A: d) Varying number of accumulation units *When investors purchase a variable annuity contract, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the subaccounts will fluctuate, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.
529 Plans
Although the contribution limits for a 529 plan are quite high, they are not unlimited. Each state establishes the maximum amount that may be contributed to all 529 plans maintained for one beneficiary. However, it's important to note that an investor who contributes the maximum amount allowable to a 529 plan may incur federal gift taxes. A single investor may contribute up to $15,000 per year ($30,000 for a couple) for each beneficiary without incurring gift taxes. An investor may also aggregate five years' worth of annual contributions and give a lump sum of $75,000 ($150,000 for a married couple) without incurring federal gift taxes.
What is a Limit Order?
An order to buy or sell a stock at a specified price or better. A buy limit order can only be executed at the specified limit price or lower. A sell limit order will be executed at the specified limit price or higher. You will not buy or sell if the specified price is not reached. A limit order to buy must be at or below the market price. A limit order to sell must be at or above the market price. --> Investors use limit orders when they're attempting to maximize profits. One advantage of a limit order is that they only execute at the predetermined price or better. This can also be a shortcoming because if the price doesn't stay in the desired range, the transaction simply doesn't take place.
Electronic Communication Networks (ECN's)
Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs DO NOT allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.
What are preemptive rights?
Preemptive rights grant the right to purchase enough newly issued shares to maintain an existing proportionate ownership in a corporation. i.e. if a common stockholder holds 3% stock in the company, they are entitled to whatever amount of newly issued shares that come out in order to maintain their 3% stake
The Fourth Market & The Third Market
The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges. The third market is the term used to describe a situation in which a security that's listed on the exchange is traded in the OTC market.
Sector Fund
a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.
No-Load Fund
an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains.
Sales Breakpoints
the sales breakpoint is the reduced sales charge a customer can receive if the invest a large sum of money in a mutual fund
