sie study material 2
Shares of stock that have actually been sold to the public are known as
Issued stock. Issued shares are the amount of stock that has been sold to the public.
Which of the following is true regarding a private securities transaction?
It is a violation of Conduct Rules. Private securities transactions are defined as transactions that take place outside the normal business activities of the member firm and are not recorded on the firm's books and records. This is known as "Selling Away," and is a violation of FINRA Conduct Rules. However, transactions among immediate family members are allowed if the associated member does not receive any compensation. In addition, personal transactions in investment company and variable annuity securities are permitted.
If the prime interest rate increases, bond prices will generally
Decrease. Bond prices are inversely related to interest rates; therefore, a rise in the prime rate will generally cause high-grade bond prices to fall.
If a mutual fund with an offering price of $30 does not offer breakpoints, rights of accumulation, and dividend reinvestment at NAV to investors, what is its allowable maximum sales charge?
$1.88 If a mutual fund does not offer all of the following privileges - breakpoints, rights of accumulation, and dividend reinvestment at NAV - its maximum sales charge is 6.25%. ($30 x 6.25% = $1.88)
Which of the following CAN benefit from the catch-up contributions provision in IRAs?
- An IRA owner age 50 - A 401(k) participant who is 57 years old - A married person with a nonworking spouse who is 53 years of age Taxpayers who are age 50 or older will be entitled to make additional "catch-up" contributions to their IRA or spousal IRA accounts. A 401(k) plan also permits participants who are age 50 or older at the end of the calendar year to make catch-up contributions.
Which of the following statements are CORRECT with regard to broker/dealers?
- An agent is a broker and trades securities for a customer. As an agent, a firm does not own the security. - Securities firms may act in the capacity of either a principal or an agent and are referred to as broker/dealers. - A principal is a dealer and sells securities from its own inventory. Dealers do not profit by charging a commission; they make their profit by charging markups on sales and markdowns on purchases.
Which of the following statements is CORRECT with regard to broker/dealers?
- An agent is a broker and trades securities for a customer. As an agent, a firm does not own the security. - Securities firms may act in the capacity of either a principal or an agent and are referred to as broker/dealers. - A principal is a dealer and sells securities from its own inventory. Dealers do not profit by charging a commission; they make their profit by charging markups on sales and markdowns on purchases.
Which of the following is a qualified exemption to the IRA early distribution rule and will incur a penalty?
- At age 60 for retirement purposes - For educational purposes - To pay for excessive medical bills Withdrawing funds for an investment property is not one of the conditions that will waive the 10% early withdrawal penalty.
All of the following statements refer to European style options
- Can only be exercised during a specific time period - Are less risky than American style options. - Often apply to stock index options. Unlike American style options, European style options can only be exercised during a specific time period, usually the last trading day before expiration, making them less risky. Options on stock indexes are generally European style.
A client with $1,000 to invest in a mutual fund for his IRA account is concerned about front-end loads reducing the size of the already small investment. The client plans on holding the investment until retirement (20 years or more). Class B shares may be more appropriate for this client than Class A shares for all of the following reasons
- Class B shares' CDSC declines over time. - Class B shares have no front-end load. - After a specified holding period of time, Class B shares convert to Class A shares. Class B shares have a higher expense ratio than Class A shares.
Which of the following may be purchased on margin?
- Closed-end investment company shares - Treasury bonds - Corporate bonds Because mutual fund companies continually issue redeemable shares, they are considered new issues and cannot be purchased on margin. In addition, mutual funds cannot be used as collateral for margin purchases until they are held in a cash account for 30 days.
Which of the following is a feature of a Roth IRA?
- Contributions may continue, regardless of age, if there is earned income. - Distributions may be deferred beyond the attainment of age 72. - Qualified distributions at the time of retirement are not taxed as income. Roth IRA contributions are NOT tax-deductible. Because the contributions are made with after-tax dollars, qualified distributions are not income taxable. In order to contribute to an IRA, the individual must be working and must have earned income. Distributions (RMD) do not have to begin at age 72.
Which of the following scenarios is a breakpoint selling violation?
- Convincing a customer to buy two funds just below the breakpoint discount level, rather than pooling the money to invest in one fund that will meet the breakpoint discount - Dividing a customer's purchase between several different mutual fund families to increase the sales charges, and the representative's payout - Accepting an order from a customer to buy a fund below the breakpoint discount level without informing the customer of the breakpoint discount A registered representative is required to inform a customer that a larger investment in one fund above a breakpoint is more cost effective than smaller investments in two or more funds that fall below the breakpoint level. All of the other choices reflect breakpoint violations. Remember that whether the purchase order is solicited or unsolicited, the registered representative must inform the customer of the breakpoint sales discount.
Which of the following is true concerning physical safety of mutual fund holdings?
- If certificates are held, they must be surrendered in good order before shares can be redeemed. - Physical safety of a fund's assets is the responsibility of the custodian. - The shareholder needs to maintain share certificates since funds use "book entry" accounting. Book entry (electronic records) is the conventional method of accounting for share ownership. In cases where certificates do exist, in order to redeem shares, they must be surrendered in good order.
All the following are considered self-regulatory organizations for the regulation of securities offerings and trading
- MSRB. - FINRA. - CBOE. FINRA, MSRB, and CBOE are all self-regulatory organizations for securities offering and trading. The SEC is not an SRO.
All the following are considered self-regulatory organizations for the regulation of securities offerings and trading
- MSRB. - FINRA. - CBOE. FINRA, MSRB, and CBOE are all self-regulatory organizations for securities offering and trading. The SEC is not an SRO.
A mutual fund that charges the maximum sales charge of 8½% allowable by the Investment Company Act of 1940 does have to offer
- Rights of accumulation. - Dividend reinvestment at NAV. - Breakpoints. Exchange rights are a convenience privilege and are not required by the Act. All of the other rights must be made available to investors in order to collect the maximum sales charges.
An investor could achieve diversification in his portfolio by holding
- Stocks of companies in different industries. - Stocks of companies in different geographic regions. - Stocks and bonds. All of the examples are excellent choices to increase and achieve a portfolio's diversification.
All of the following are duties of a transfer agent
-Issuing new shares physically or electronically. -Canceling redeemed shares. -Distributing capital gains to shareholders. Transfer agents are contracted by the fund to perform basic clerical functions, including keeping track of the individuals and entities that own their stocks and bonds, issuing new shares, and canceling redeemed shares. Holding customers' securities for safekeeping is a function of the custodian.
A shareholder owns 200 shares of stock with cumulative voting rights. If there are five vacancies being voted upon, what is the maximum number of votes the shareholder may cast for any one vacancy?
1,000 The number of votes controlled by the shareholder is always calculated using the same formula: number of shares × number of vacancies. Under the cumulative method, the shareholder may allocate those votes among the vacancies in any way he desires. In this example, the investor might choose to concentrate all 1,000 of his votes on one vacancy. Consequently, he would forfeit any vote on the remaining four vacancies.
ABC Corporation has earnings of $5 per share and has paid a quarterly dividend of $.75. If ABC is currently trading at $30 a share, what is the current yield for ABC's stock?
10% Current yield is determined by dividing the annual dividend by the current market price. Since ABC has paid a $.75 quarterly dividend, multiply $.75 times four to get annual dividend income of $3 per share. Then, divide $3 per share by the current market price of $30 per share to get the yield of 10%.
Sell ABC short 20 stop 20.50. The ticker tape shows: 19, 20, 21, 20.50, 20.25. At what price was the trade executed?
21 Sell short 20 stop 20.50 (limit) is triggered or elected at 20 or below, and executed at or above 20.50. The order is triggered at 19 (20 or below), and execution occurs at 21 (the next price that is 20.50 or above).
A customer who purchases securities in a cash or margin account must pay for the securities in
4 business days. A security purchased on margin must be settled in 4 business days. This differs from the 2 business days' settlement date for securities settling regular-way.
The Investment Company Act of 1940 states that a certain percentage of a mutual fund's board of directors be unaffiliated with the fund. This minimum percentage of unaffiliated members must be at least
40%. The board of directors is elected by fund shareholders and 40% of these board members must be unaffiliated with the fund. The remaining 60% may be employees, underwriters or advisers of the fund.
A director of a public corporation wishes to sell some of his stock in the company. Under SEC Rule 144, how long is the holding period?
6 months Before restricted securities may be sold in the marketplace, they must be held for a specified period of time. If a selling company is subject to the SEC reporting requirements, the securities must be held at least 6 months; otherwise, at least 1 year.
According to the Investment Company Act of 1940, the maximum sales charge is
8½%. Sales charges must not be excessive and are limited to 8½%.
An investor is short 20 DEF April 70 puts. He enters an order to buy 10 DEF April 70 puts. This order is
A closing buy order. This is a closing buy order. The investor is reducing an existing options position.
FinCEN requires banks and broker/dealers to adhere to anti-money laundering (AML) rules, including
A designated independent party to test the procedures. Firms are required to establish anti-money laundering (AML) policies and procedures, provide employee training, appoint an AML compliance officer and schedule independent testing of the program. In addition, the procedures must contain features to detect suspicious activity and money laundering activity as well as confirm customer identification.
The syndicator of a limited partnership is a corporation or person
Acting as the organizer of the partnership. The "syndicator" is the organizer who handles securities registration.
Who can make a fully deductible contribution to an IRA?
An individual not covered by an employer-sponsored plan Any eligible person not participating in a qualified retirement plan can make a fully deductible contribution to an IRA. In addition, individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level. Individuals who are covered by an employer-sponsored plan are subject to income limitations.
After receiving an initial privacy notice, subsequent privacy notices should be provided to customers
Annually. Consumers must be provided with an initial privacy notice at account opening; those who become customers should receive annual privacy notices.
The highest price a dealer is willing to pay for a security is known as the
Bid price. A customer selling a secondary market security will receive the bid price, which is the highest price a dealer is willing to pay.
The ex-dividend date for XYZ is Monday, March 23. Under which of the following conditions would an investor purchasing XYZ receive the dividend?
Buys XYZ Friday, March 20 in a regular way trade If Monday, March 23 is the ex-date, then Tuesday, March 24 is the record date. Therefore, a regular-way purchase on Friday, March 20 would buy (or receive) the dividend because settlement occurs on Tuesday, March 24 (or T+2) meeting the requirement that settlement must occur on or before the record date.
What type of annuity contract could act as a hedge against either inflation or deflation?
Combination annuity A combination annuity is a good hedge against inflation and deflation because a portion of the contract pays fixed interest, while the remaining portion could be placed in a variable annuity, which offers inflation protection.
Obsolescence is a risk most closely associated with which type of limited partnership?
Equipment leasing Obsolescence is a risk most closely associated with equipment leasing limited partnerships. If the equipment becomes outdated and can no longer be used, there will be no rental income. For example, investors in a limited partnership that owns and leases planes would lose their rental income if the planes were no longer safe to fly.
Regulation T of the Securities Exchange Act of 1934 gave the power to establish margin requirements to
Federal Reserve Board. The Federal Reserve Board, a federal agency that controls the amount of money and credit in the economy, has the authority to establish margin requirements.
Uniform Termination Notice for Securities Industry Registration is also known as
Form U5. Just as an applicant completes a Form U4 for registration with a FINRA member, registered representatives are terminated by the member firm through the completion of a Form U5, or Uniform Termination Notice for Securities Industry Registration.
A well-known seasoned issuer is issuing securities in an APO. To meet Act of '33 disclosure requirements, the issuer may use a/an
Free-writing prospectus. WKSIs may use a free-writing prospectus for additional primary offerings (APOs) or add-on offerings.
Under Rule 144, when does an affiliate need to file a Notice of Proposed Sale with the SEC?
If the sale involves more than 5,000 shares If the sale involves more than 5,000 shares, or if the aggregate dollar amount is greater than $50,000 in any 90-day period, affiliates must file a notice with the SEC.
Which oil and gas program has the least capital risk?
Income Income programs are the safest type of oil and gas program because they are based on producing wells where production is already established and quantifiable.
For an individual who is NOT covered by an employer-sponsored plan, IRA contributions are
Individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level.
A client calls his registered representative (RR) to ask her to buy 500 shares of XYZ Corp because he heard a dividend has been declared, but not paid yet, and he wants to receive the dividend. How should the RR respond to the client?
Inform the client of the consequences and refuse the order This question is about a prohibited practice known as "selling dividends". Registered representatives are prohibited from advising an investor to purchase a stock for the sole purpose of receiving the dividend. The registered representative must inform the client of the consequences of buying a stock just before a dividend is paid. If the client were to purchase the stock just before the ex-dividend date, he would have an unrealized loss on the stock when the price drops on that date and he would have a tax liability because dividends are taxable.
The agreement among underwriters, also known as the syndicate letter, is a document that
Is an agreement between participating broker/dealers who assume liability for any unsold shares and specifies the underwriters' responsibilities and participation percentages. The agreement among underwriters, also known as the syndicate letter, is between the broker/dealers who have formed the underwriting syndicate. It spells out the responsibilities of each syndicate member and each member's percentage liability. It is important to differentiate the agreement among underwriters from the underwriting agreement. The agreement among underwriters is between syndicate members. The underwriting agreement is between the managing underwriter and the issuer.
Preemptive rights allow a stockholder to
Maintain proportionate interest in the company. Preemptive rights allow the stockholder to maintain proportionate ownership in the company by having the first opportunity to buy new shares.
An employee making $20,000 a year contributes to an IRA for 2 years. The employer then begins a qualified plan. With regard to IRA contributions, the employee
May continue to make IRA contributions and deductions. The taxpayer can continue fully deductible IRA contributions while under a qualified plan as long as the payer's income does not exceed certain thresholds.
After the first annuity payment is calculated in a variable annuity, future payments are calculated by
Multiplying the number of annuity units by the current redemption value of a unit. The redemption value of an annuity unit changes with the performance of the separate account compared to the Assumed Interest Rate. For example, if the separate account outperforms in a given month, the resulting increase in redemption value will increase the amount of the next month's payment.
A customer owns 500 shares of XYZ Mutual Fund A shares. She can redeem her shares at the
NAV Class A shares are redeemed at the NAV.
Why might the expense ratio of a no-load mutual fund be lower than that of a mutual fund with a load?
No-load funds may not charge a 12b-1 fee that is greater than 25 basis points. Mutual funds with loads may charge a higher 12b-1 fee, whereas the 12b-1 fee for a no-load fund cannot be greater than 25 basis points. Otherwise, they lose their "no-load" status. Remember that a 12b-1 fee is a distribution fee that mutual funds charge to cover the cost of marketing and distributing fund shares. It is included in the expenses of the fund, thereby impacting the expense ratio. Do not be confused by the sales charges associated with load funds. They are not included in the expense ratio calculation but, rather, are added to the NAV to determine the sales price. Remember, NAV + SC = POP.
The method by which a mutual fund offering price will be determined is
Outlined in the prospectus. The actual offering price is the net asset value (NAV), plus any sales charges, but the method used to determine the fund's pricing can be found in the prospectus.
Which of the following would ensure that the numbers of shares printed on the stock certificates are equal to the number of shares that are outstanding for the corporation?
Registrar It is the registrar's job to make sure that the number of shares printed on the certificates is equal to the number of shares outstanding for the corporation. The transfer agent's job is to physically transfer the ownership of the shares.
Under Regulation T, the 90-day restriction applies to a customer who purchases and subsequently sells
Same stock in a cash account without having first fully paid for the purchase. Customers must pay for cash account purchases in T+4, or the account will be subject to a 90-day restriction. Remember that T+4 is trade date plus 4 business days.
The Act that requires financial institutions to develop, implement and monitor procedures that prevent its agents and associates from misusing nonpublic information is the
Securities and Exchange Act of 1934. The Securities Exchange Act of 1934 requires that broker/dealers establish, maintain, and enforce procedures to prevent the misuse of nonpublic information by any person associated with the firm.
If a call holder chooses to exercise the call, the writer must
Sell 100 shares of the underlying security at the strike price. Call holders have the right to buy. Therefore, the writer of the call option would be obligated to sell 100 shares at the strike price if the contract was exercised.
What is the consequence of contributing more than the specified maximum to a Roth IRA?
The investor will pay a tax penalty. There is a specified maximum contribution that can be made to Roth IRAs, as with traditional IRAs. If a taxpayer contributes more than the maximum amount, a 6% tax penalty will be imposed.
What are the two types of voting processes used by corporations?
Statutory and cumulative There are two types of voting processes used by corporations: statutory voting and cumulative voting. With statutory voting, shareholders are permitted one vote for each share owned to be voted for each director. With cumulative voting, shareholders can multiply the number of shares owned by the number of directorships and cast the votes in any manner desired.
When a general partner is organizing and establishing a limited partnership, the general partner is acting as a
Syndicator. When a general partner in a limited partnership is organizing and establishing a partnership itself, the term that applies is "syndicator."
A client wants to discuss the assignment of his short call option on XYZ. The market price is $1.00 out of the money but the market price has been increasing steadily. He asks when he is required to deliver the stock. Which of the following is the correct means of option assignment for his call?
The Options Clearing Corporation decides which broker/dealer will deliver the securities. Then the broker/dealer will assign one of their clients by random selection. The client might not be assigned. The process of assignment for options is random on the part of both the Options Clearing Corporation (OCC) and the broker/dealer. When an investor wishes to exercise his option, he notifies the broker/dealer. The broker/dealer notifies the OCC and then the OCC randomly selects a broker/dealer that has an open position to be exercised. That broker/dealer then randomly selects one of their clients to deliver securities to or to buy the securities when assigned a put option. FINRA is not involved.
A customer instructs his broker/dealer to purchase 200 shares of Dunham Corporation. Two days after trade date, the customer decides that he no longer wants the shares. Which statement is correct?
The customer has entered into a legally binding contract and is obligated to pay for the stock. On trade date, the terms of the trade are set, and the customer has entered into a legally binding contract.
A customer purchased 100 shares of XYZ stock at $30 per share. Two years later, the customer donated the shares to charity. At the time of the donation, XYZ had a market value of $50 per share. What are the tax consequences for the customer?
The donor will have a $5,000 income tax deduction. Subject to certain restrictions, charitable donations of stock are tax deductible at their market value at the time of the donation, in this case, $5,000. The donor is not subject to capital gains tax on the appreciation. The recipient's cost basis is $5,000.
A 50-year-old individual needs $20,000 for his child's education, and wishes to withdraw the necessary funds from his traditional IRA. Which of the following statements is true concerning taxation on the withdrawal?
The entire amount will be taxed as ordinary income. Withdrawals from a traditional IRA are subject to regular taxation. In addition, a 10% premature withdrawal penalty is assessed on anyone withdrawing the money under age 59½. However, the penalty will be waived if the distribution is due to the owner's death or disability, for medical or education expenses and first-time home ownership. The withdrawal is still subject to taxes as ordinary income.
Which of the following is considered a conflict of interest in a limited partnership?
The general partner self-dealing to insure profits without regard to the limited partners The general partner (GP) has a fiduciary responsibility to the limited partner (LP) and cannot act without considering the LP's interests.
A customer has purchased $15,000 worth of XYZ Corporation over a period of time. Which of the following is true about his subsequent sale of $5,000 of XYZ stock?
The investor is allowed to specify which shares are being sold to minimize his capital gain. The investor can choose the specific identification method of particular shares sold, or, in the absence of a specified method, the IRS will use First-In, First-Out (FIFO). Therefore, the share, or specific, identification method is most common.
The board of directors declares a dividend on Wednesday, Oct. 5, to shareholders of record as of Thursday, Oct. 20. If an investor purchased the stock on Thursday, Oct. 20, in a cash transaction, which of the following statements would be true?
The investor would be entitled to receive the dividend because the stock was purchased using cash settlement. An investor that purchases the shares on the record date for cash settlement is the owner of record as of that date. The investor is therefore entitled to the dividend. For cash transactions, the ex-dividend date is the day after, not the day before, the record date. The way to remember this is to remember the acronym DREP (Declaration, Record, Ex-date, Payable).
A bond's call premium is defined as the amount
The issuer pays the bondholder to exercise the call. The "call premium" is the price above the par value of the bond that the issuer pays to encourage the bondholder to exercise the call privilege.
Which of the following correctly describes a bond's interest accrual period?
The last payment date up to but not including settlement date. The bond purchaser owes part of the next semiannual interest payment (accrued interest) to the bond seller. The seller is entitled to the first portion of the interest payment (from the last payment date up to but not including settlement date) and the buyer will earn the second portion (from settlement date until the next semiannual payment date).
If an option contract is covered, this means that
The option writer is long the underlying security. In a covered option contract, the option writer is long or owns the underlying shares. If the option holder exercises the option contract, the option writer is obligated to deliver the security or cash and is protected by owning the underlying security or having cash available equal to the exercise price. Remember that the terms naked and covered apply to the options writer.
Which of the following is true of restricted stock?
The purchase must be paid for in its entirety. If a selling company is subject to the SEC reporting requirements, the securities must be held at least 6 months. Otherwise, they must be held at least 1 year. The holding period begins when the securities are bought and fully paid for. A broker/dealer can act as an agent, but restricted stock is not registered with the SEC.
Which of the following applies to put option contracts?
The put holder has the right to sell at the strike price. A put option is a contract that gives the put holder the right to sell 100 shares of the underlying security at the strike price (also called the exercise price), until expiration. Long put - right to sell. Short put - obligation to buy.
An investor wants to give her daughter all of the shares in her growth mutual fund. Since the initial purchase, the value of the shares has increased steadily over the life of the investment. When the shares are gifted, the cost basis of the daughter's shares will be
The same cost basis that the investor had for the shares. When a security is received as a gift, the cost basis depends on the relationship of the market value of the securities to the donor's cost basis. If the market value is higher than the donor's basis, the recipient's cost basis is equal to the donor's. If the market value is lower than the donor's cost basis, the recipient's basis is equal to the market value of the securities at the time of the gift.
When comparing two similar bonds,
The secured bond's yield will be comparable to the unsecured bond yield. Because the debenture (unsecured bond) is riskier than the secured bond, investors will demand a higher yield. Income (adjustment) bonds are very risky and therefore trade at a significant discount, resulting in a higher potential yield than a secured bond.
Who obtains the CUSIP for a municipal bond issue?
The underwriter Obtaining the CUSIP is the responsibility of the underwriter.
An investor anticipates interest rates will rise sharply over the next 2 years. In this scenario, which investment below would allow the investor to profit with the least amount of risk?
Treasury bonds T-Bills are a good hedge against interest rate risk. As the bills mature, the investor can earn higher rates of return by rolling these short-term securities into new bills. Long term maturities have a high degree of volatility in interest rate fluctuation periods and should be treated with some caution.
Which of the following falls under the category of an exempt security?
U.S. government bond Only the U.S. government bond is an exempt security; the rest are considered nonexempt securities and must be registered under the Securities Act of 1933.
A husband and wife want to make a contribution to their IRAs. The husband earns $35,000 a year. The wife is currently not working. What is the maximum they can currently contribute into their IRAs?
Up to $6,000 for the husband and $6,000 for the wife The maximum amount an individual can contribute annually to an IRA is up to 100% of earned income not to exceed $6,000. The same amount can be contributed for a nonworking spouse in a separate account, called a spousal IRA.
When are "catch-up" contributions allowed in an IRA?
When the contributor reaches the age of 50 Taxpayers who are age 50 or older are entitled to make additional "catch-up" contributions.
With regard to sales breakpoints, any schedule changes must be communicated to existing shareholders within what period of time?
Within 1 year Investment companies have 1 year to advise existing shareholders of changes to breakpoint schedules.
If XYZ stock is trading at 27.50, which of the following options are in-the-money?
XYZ July 25 call The July 25 call is in the money by 2.50. A call is in the money when the price of the underlying security is higher than the strike price. A put is in the money when the price of the underlying security is lower than the strike price.
