SIE- Understanding Products and Their Risks

A March 30 call purchased at 3 has expired without being exercised. The owner of the call

loses the $300 premium paid --- The owner (buyer) of the call would have paid 3 ($300) for the contract. If the contract expires unexercised, the owner loses the $300 premium paid.

All of the following could be characterized as benefits to owning common stock EXCEPT

low dissolution priority -- Low dissolution priority refers to being paid last in the event of a corporate dissolution (bankruptcy). Obviously, this is not a benefit. However, price appreciation and the receipt of dividends are potential benefits and limited liability is guaranteed, only being able to lose what one has invested.

Common stockholders owning dividend paying stocks are exposed to

market risk and current income risk -- In owning common shares, the investor stands to lose current income through dividend reduction or suspension (current income risk), as well as capital loss, should the market price decline (market risk).

A preemptive right for existing shareholders is best described as

the right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares --- Existing shareholders have what is known as a preemptive right, which is the right to maintain their proportionate share of ownership in the corporation if the company wants to issue additional shares.

Regarding a corporate bankruptcy and the liquidation priority, which of the following is accurate?

Debt securities claims are satisfied before equity securities claims. -- In the event of a corporate liquidation, the order of claims priority would be as follows: taxes (IRS) and wages, all debt instruments next (secured first, then unsecured with subordinated debt last), and then equity securities with preferred shareholders paid first, before common shareholders, who are last of all claimants to be satisfied.

Which of the following would all be considered the same regarding yields on debt instruments?

Stated, nominal, and coupon yields --- The interest rate the issuer has agreed to pay the investor is the coupon yield. The coupon yield is also called the stated or nominal yield.

Your customer has one position in her account and it poses an unlimited loss potential. Which of the following is it?

Short call

Your customer wants to be in a position to buy CDS stock while taking in premium. Which of the following options positions might accomplish this?

Short puts -- Long calls or short puts would meet the criteria of being in a position to buy stock, but only sellers of options take in premium (income). Therefore, to meet both criteria, shorting puts would be the only basic option position that might accomplish this.

An investor is long 6 MAS February 60 calls at 2.25 each. If at the time of the February expiration, the calls expire unexercised, how much money will the investor lose?

$1,350 -- Buyers of options (calls or puts) lose the premium paid if the options expire unexercised. The most this investor can lose is the number of contracts (6) multiplied by the amount of the premium received, $225. Therefore, this investor's maximum loss is $1,350.

DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past 3 years but now is in a position to resume paying them again. Before paying common shareholders a dividend, the company would be required to pay the preferred shareholders

$4.00 --- With noncumulative preferred stock, missed or skipped dividends need not be paid or made up. However, in order to pay common shareholders in any year, preferred shareholders must receive their full dividend for that year. While it can be paid in one annual payment, quarterly, or however the board approves it to be paid, the total in this case would be $4.00. 4% × $100 par value = $4.00.

Under the rules, a penny stock is denied as an unlisted, securite trading at less than?

$5 per share -- SEC rules define penny stocks as those that are unlisted on an exchange or NASDAQ trading at lee than $5 per share.

An investor has purchased a bond with a 5% coupon. This investor will receive

$50 annual interest until maturity -- The coupon represents the annual rate of interest payable. A bond with a 5% coupon will pay $50 interest annually (5% × $1,000 par value = $50).

An investor purchases 1 KLP October 95 put at 6.50. What is the investor's maximum potential gain with this position?

$8,850 --- The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). Because one contract represents 100 shares, the owner's maximum gain is $8,850 and would occur if the stock falls to zero. Remember, put buyers are bearish; therefore, they will make money if the stock falls below the breakeven point—in this case, below 88.50.

An investor is short 1 December 15 put at 6. The investor's maximum loss on this position is

$900 -- A put writer's maximum loss is the put's strike price (15) less the premium received (6)—in this case, 9 points. Note that this is the same as the breakeven. This maximum loss occurs when the stock price drops to zero. The investor is forced to buy the worthless stock at the option's strike price of 15 and, therefore, has lost 15 points. The investor's total loss (15), however, is reduced by the premium (6) received, making the ML 9 points ($900).

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days?

1 ---Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume (whichever is greater), every 90 days.

Commercial paper issued by corporations can have maturities as short or as long as

1 day or 270 days -- Commercial paper is issued by corporations to meet short-term cash needs. A form of money market instrument, it can have maturities as short as 1 day (literally overnight) or as long as 270 days (9 months).

A registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is CORRECT?

1. 6% is the bond's coupon 2. 6.5% is the bond's yield to maturity --- When a bond is referred to by a yield percentage (6%), it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% coupon bond currently trading with a 6.5% YTM.

Regarding limited partnerships, which of the following are TRUE?

1. A general partner can be held personally liable for business losses and debts 2. A general partner business decisions are legally binding on the partnership. -- General partners have unlimited liability, meaning that they can be held personally liable for the partnership's losses and debts. In their role to manage the partnership, they make decisions that are legally binding on the partnership.

Which of the following are considered systematic risks—those that would impact all businesses?

1. Market risk 2. Inflation risk -- Systematic risk is the risk that changes in the overall economy will impact securities regardless of the company's business. Examples of that are inflation (purchasing power) risk, interest-rate risk, and market risk. Business risk and regulatory risk are examples of nonsystematic risk, the kind of risk that might be unique to certain businesses or industries.

Which of the following are the 2 basic types of Section 529 plans, which are products used for funding higher education?

1. Saving Plans 2. Prepaid tuition plans -- The savings plan allows the investor to accumulate money for use later in funding someone's education. The prepaid tuition plan allows the purchaser to pay the tuition for a particular K-12 or higher education institution at current rates, either in a lump sum or by periodic payments. The beneficiary of the plan then attends the institution, perhaps many years later, tuition-free. Note that ESAs are not a type of 529 plan.

Penny Stock rules?

1. Specify that established customers of the firm need not sign a suitability statement 2. require that prospects be given a copy of a risk disclosure document before their initial penny stock transaction -- Penny stock rules only apply to solicited transactions, and it is required that the penny stock disclosure document be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.

For Treasury bills, which of the following are TRUE?

1. T-bill are issued at a discount to par 2. T-bills are a direct obligation of the US government -- T-bills are issued at a discount to par, are 6 months or less to maturity, and are a direct obligation of the U.S. government. Callable and convertible features are those that should be associated with corporate issues not government issues.

A put option reaches its expiration date and goes unexercised. This means

1. The buyer loses the premium paid 2. The writer gains the premium received -- Buyers of options pay the premiums for the contracts, and writers (sellers) receive the premiums. If any contract, put or call, goes unexercised at expiration, the buyer loses the premium paid while the seller gets to keep it; a gain.

Which of the following would cause a mutual fund's NAV per share to fall?

1. The fund pays a dividend to shareholders. 2. The market value of the portfolio declines. -- Paying a dividend and suffering market decline both reduce the net assets of the fund without reducing the number of shares; hence, the NAV declines. Purchasing portfolio securities simply replaces portfolio cash with an equivalent value of securities; hence the NAV remains unchanged. Redemption of shares reduces the fund's net assets, but the number of shares declines by an equivalent proportion; hence, the NAV remains unchanged.

Investors face many different risks. Which of the following would be factors of systematic risk?

1. War 2. Global security threats -- Systematic risk points to changes in the overall economy. It has an adverse effect on individual securities apart from the company's circumstances. It is generally caused by factors that affect all businesses, such as war, global security threats, or rampant inflation. No matter how diversified a portfolio is, it remains subject to systematic risk. An investor cannot diversify systematic risk away.

With money market securities, the risks are

1. a lower return than with longer-term instruments 2. the potential reinvestment of principal at different rates over short periods of time -- Because of their short-term maturities, money market instruments are relatively liquid and safe compared with other debt securities. These are considered advantages. The risks, however, would be lower returns (a trade-off for the safety) and potentially having to reinvest one's funds at a different rate each time the instrument matures (short intervals). In this light, not only is income minimal, but it will fluctuate with each new instrument purchased.

Priority at dissolution for preferred shareholders means that they are paid

1. after alll creditors 2. before common shareholders -- While preferred shareholders would not be paid until all creditors debts have been satisfied, they are paid first of the equity securities, which means they are paid before common shareholders.

A bond with a 4.5% stated yield might make

1. annual interest payments of $45 2. Seminannual interest payments of $22.5 -- A bond with a 4.5% stated, nominal, or coupon yield pays $45 annual interest (4.5% × $1,000 par value). If the $45 annual interest is paid in semiannual payments, each would be $22.50.

Straight preferred shares

1. are noncumulative 2. have no provision for paying missed dividends later -- Straight preferred shares have no special features beyond the stated dividend payment. Any missed dividends are not paid to the holder, thus they are noncumulative; missed dividend payments do not accumulate.

Municipal revenue bonds

1. do not require voter approval 2. are not subject to statutory debt limits -- Revenue bonds are designed to be self-supporting. They are backed by the revenue derived from the project funded by the bonds. Because they are not backed by property taxes, voter approval is not required. GO bonds however are backed by taxes, such as ad valorem (property) taxes, and therefore voter approval is generally required. With GO bonds, there is a debt ceiling or limit imposed on the issuer as well. Because they are backed by taxes, the issuer is limited as to how much can be issued. They generally have a higher rating than the same issuer's revenue bonds.

The Market price of a company's common stock could be affected by

1. the company's earnings 2. the changes in the business cycle 3. FRB policies 4. International conflicts

Identify 2 trading strategies that a hedge fund could employ in its portfolio but a mutual fund cannot.

1. trading on margin to purchase portfolio securities 2. selling short stocks. -- While there can be limited and rare exceptions, mutual funds are prohibited from purchasing securities on margin and selling securities short. Both strategies, however, are commonly employed by hedge funds.

A bond backed by a corporation's full faith and credit is

1. unsecured 2. not backed by any assets -- When a bond is backed by a corporation's full faith and credit, it is backed only by the reputation, credit record, and financial stability of the corporation. Not being backed by any of the corporation's assets, this bond is unsecured.

Common stockholders of a publicly traded corporation have which of the following rights and privileges?

1.Residual claim to assets at dissolution 2. Right to receive an audited financial report on an annual basis -- Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. The board of directors would vote to pay a dividend.

Treasury bonds mature in

10 years or more -- Treasury bonds (T-bonds) are the U.S. government's long-term debt instrument having maturities of 10 years and up to 30 years.

Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does NOT exceed.

10% --- If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.

MAS Corporation has enjoyed an extremely profitable year. It has been determined that those owning the MAS 4% preferred, participating to 6% preferred shares, will receive the full participating dividend. The participating shareholders will receive an additional dividend of

2% -- The stated MAS preferred dividend is 4%, participating up to 6%. In this year, when it has been determined that they should receive the full participating dividend, they will receive the additional participating 2%.

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and was missed in the 2 previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay this customer per share first?

24 --- If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears (missed). There are $16 due in back dividends for the 2 years missed, in addition to $8 this year, for a total of $24.

An investor has asked a mutual fund company for a copy of its Statement of Additional Information (SAI). How long does the fund have to comply with the request?

3 business days from the date of the request -- If an investor asks for a copy of a mutual fund's SAI, the copy must go into the mail no later than the end of the 3rd business day from the date of the request. It must also be supplied free of charge.

An investor asks for a copy of mutual funds Statement of Additional Information (SAI). The request must be satisfied within

3 business days, free of charge -- Requests for an SAI must be complied with within 3 business days free of charge.

Someone who is short 1 August 35 put at 3 will breakeven at

32 -- For puts, the breakeven is found by subtracting the premium (3) from the strike price (35). Put sellers are bullish; therefore, the short put contract is profitable at or above the breakeven at expiration.

An investor is long a January 30 call at 2. Breakeven is

32 -- Breakeven for a long call is premium (2) plus strike price (30)—in this case, 32 points. The investor needs the stock to be above the breakeven point to make a profit.

An investor is short a January 30 call at 5. Breakeven is

35 -- Breakeven for a call (long or short) is premium (5) plus strike price (30). In this case 35 points. Because short calls are bearish, the investor who is short the call needs the stock to be below the BE (35), while the investor who is long the call wants it to be above the breakeven point (35) to make a profit. Always remember that BE for both parties to the contract is always the same number.

Your customer establishes the following position: Long 1 XYZ January 50 put at 2. You can correctly inform the customer that the maximum potential gain on the position is

4,800 -- Maximum gain for a long put is calculated by subtracting the premium from the strike price (50 − 2 = 48 per share). One contract represents 100 shares, so the buyer's maximum gain is $4,800 (this occurs if the stock becomes worthless).

When a limited partnership is liquidated (dissolved), the priority of payments to settle accounts are made from first to last in which order?

4.General partners 3.Limited partners 2.General creditors 1.Secured creditors

Your customer is long 1 October 55 put at 4. The customer's breakeven point is

51 -- For puts, the breakeven is found by subtracting the premium (4) from the strike price (55). Because put buyers are bearish, the long put contract is profitable below the breakeven at expiration.

A customer writes an MMM January 70 put at 6. The maximum potential gain on this position is

600 -- The potential gain on any short (written) option position, call or put, is the premium received on the transaction.

A mutual fund's public offering price is $15.23. An investor who wishes to invest $1,000 in the fund will purchase how many shares?

65.66 shares -- Mutual funds can issue fractional shares. This is an advantage for those who invest in mutual funds because they can think in terms of the dollars they want to invest rather than in the numbers of shares they want to purchase. Wanting to invest $1,000 at the current price of $15.23 allows 65.66 shares to be purchased ($1,000 / $15.23 = 65.66 shares).

The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105-½ is approximately

7.1% --- A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109%, or approximately 7.1%.

The sales charge for Class A shares may NOT exceed

8.5% of the total investment -- Though they are almost always much smaller, sales charges for Class A shares may not exceed 8.5% of the money invested. For example, if an investor spends $1,000 for Class A shares, no more than $85 may be charged as a sales load.

Regarding different types of debt security maturities available to issuers, which of the following is accurate?

A balloon maturity uses elements of both serial and term maturities. -- An issuer can schedule its bond's maturity using elements of both serial and term maturities. This is known as a balloon maturity. The issuer repays part of the bond's principal before the final maturity date, as with a serial maturity, but pays off the major portion of the bond at maturity.

Corporate shareholder structure regarding liability is different from that of a partnership. In recognizing that, which of the following is TRUE?

A corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy. --- During a bankruptcy dissolution process, a corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy. Corporate shareholders have limited liability, risking only what was invested. By contrast, a partner or a sole proprietor risks not only any amount invested but also personal assets should the business not be able to pay off its obligations.

Which of the following need NOT be included in the annual reports a mutual fund provides to its shareholders?

A list of the most poorly performing portfolio securities --- Aside from the basic financial data a mutual fund must provide at least semiannually, additional disclosures specific to mutual fund companies - investment strategies, comparative performance, personnel managing the portfolio - are intended to enhance and align with full disclosure. A separate list of either good or poorly performing investments is not among the required disclosures.

Tax-advantaged savings accounts for individuals with disabilities and their families are

ABLE Accounts -- ABLE accounts are tax-advantaged savings accounts for individuals with disabilities and their families. They were created as a result of the passage of the Achieving a Better Life Experience Act. The beneficiary of the account is the account owner, and income earned by the accounts is not taxed. The ABLE Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age 26.

Which of the following statements is correct concerning the pricing of ADRs?

ADR pricing is dollar-based and fluctuates throughout the day. -- Many ADRs are listed on exchanges such as the NYSE or Nasdaq. ADRs trade throughout the day and settle in the same manner as would the shares of a U.S.-based company. ADRs are priced in U.S. dollars.

A company reorganizing with the intent to emerge from a bankruptcy is likely to issue which of the following type of bonds to accomplish that goal?

Adjustment bonds --- Income bonds, also known as adjustment bonds, are used when a company is reorganizing. These bonds allow the issuer to only pay interest if the corporation has enough income to meet the interest payment obligations. This allows the corporation some flexibility while attempting to reorganize and emerge from bankruptcy.

Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is TRUE?

All reduce investor returns because they reduce the amount of money available for the fund to invest. --- Sales loads go to the underwriters or broker-dealers selling the shares for the fund. Therefore, they are subtracted from the dollars invested and in that light reduce possible returns for investors. Management fees and operating expenses are ongoing costs to the fund and, therefore, reduce the dollars that can be invested, again reducing potential returns.

Regarding the purchase of new equity issues by restricted persons, which statements are TRUE?

An investment club is permitted to buy a new equity issue at the offering price. An investment club that has a registered representative as a member is not permitted to buy a new equity issue at the offering price. --- As long as an investment club has no restricted persons as members, the club may purchase new equity issues at the public offering price. A registered representative is a restricted person under the rules regarding the purchase of new equity issues.

Which of the following regarding open-end (mutual fund) and a closed-end management investment company is TRUE?

An open-end company may sell fractional shares, but a closed-end company may not. --- Open-end shares are redeemable and may be purchased in specific dollar amounts. This results in fractional shares being sold. Closed-end shares trade on the open market, and are therefore traded in round lots of full shares only. The other choices reverse the characteristics of open-end and closed-end companies.

Which of the following issues only common stock?

An open-end management investment company -- An open-end (mutual fund) management investment company may only issue redeemable common stock. A unit investment trust offers units of beneficial ownership. A closed-end management investment company may also issue bonds and preferred stock, while a face-amount certificate company offers a contract, as opposed to units or shares.

Which of the following expressions describes the current yield of a bond?

Annual interest (coupon) payment divided by current market price -- The current yield on a bond is calculated by dividing the annual interest (coupon) payment by the current market price of the bond: Annual coupon payment ÷ market price = current yield.

Which of the following statements regarding bond interest is TRUE?

Bond prices have an inverse relationship to interest rates. --- Bond prices have an inverse relationship to interest rates. If interest rates go up, bond prices for those bonds trading in the secondary markets will go down. Conversely, if interest rates decline, bond prices rise. Par value is a fixed number for the life of the bond.

Mr. Smith purchases 2% of MES Corporation's common stock. Four years later Mrs. Smith purchases 9% for her own account. Which of the following is TRUE?

Both Mr. and Mrs. Smith are considered control persons. -- If a 10% or more interest is held by immediate family members, then all those family members owning voting stock are control persons. In this instance the combined ownership is more than 10% (2% + 9% = 11%).

Which of the following is a characteristic shared by both corporate debentures and income bonds?

Both must pay principal as it comes due. --- All bonds must pay principal when due. Income bonds, however, are not required to pay interest when due unless the earnings of the issuer are deemed to be sufficient and the board of directors declares that interest payments be made.

For options investors, which of the following are TRUE?

Buyers pay the premium for the right to exercise. Sellers receive the premium and incur an obligation to buy or sell. --- Those who buy options contracts pay the premium for the right to exercise (buy or sell the underlying security). Those who sell the contract incur the obligation to either buy or sell the underlying to fulfill the buyers exercise.

An investor believes the price of an exchange-listed stock will likely fall in the near term. Which of the following option strategies would best support this belief?

Buying puts -- A put buyer is a bearish investor because she anticipates the market to fall. The put is exercised only if the market price of the stock falls below the strike price.

Which of the following securities is the underlying asset used to create an ADR?

Common shares --- ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares of a foreign issuer are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. Each ADR may represent one or more shares of foreign-company stock held on deposit.

Which of the following features of preferred stock allows the holder to reduce the risk of inflation?

Convertible --- Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.

Which of the following is a unique risk incurred by investors in mutual funds that specialize in holding securities in the fund portfolio from foreign issuers?

Currency risk --- A foreign stock or bond issuer runs all the usual risks associated with business, finance, and investment, but currency risk is peculiar to foreign investments. If the foreign currency involved weakens against the dollar, dividends and interest paid by the foreign company will buy fewer dollars and thus be smaller as far as the American investor is concerned.

A court has ordered a corporation to liquidate all assets under a federal bankruptcy proceeding. Which of the following is TRUE?

Debtholders are paid before stockholders. -- When a corporation is liquidated, employee wages and accrued taxes are paid first. These are followed by all debt instruments, which are to be followed by equity holders (stockholders). One of the preferences for preferred stockholders is that, in a liquidation, any preferred stock classes are paid before common stock.

A common stock shareholder's residual right to corporate assets refers to which of the following?

During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debtholders and preferred shareholders are paid. -- For common shareholders, having a residual right to corporate assets means that they will only be paid in the event of a corporate dissolution if there are any funds left after debtholders and preferred shareholders are paid.

Regarding exchange-traded funds (ETFs), as compared to open-end (mutual) funds, which of the following are TRUE?

ETF transactions are subject to commissions. ETFs may trade at a price that is less than the NAV per share. --- Because ETFs usually track an index, the operating expense ratios are generally lower than that of open-end companies. But that advantage can be canceled out by the commission charges when purchasing and selling an ETF. An open-end investment company must redeem shares at the NAV per share; with ETFs, pricing is based on supply and demand, making it possible to receive less than NAV. One cannot purchase open-end shares on margin, but ETFs can be.

When speaking to a customer about exchange-traded funds (ETFs), a registered representative could make which of the following correct statements?

ETFs have different potential tax consequences than mutual funds. --- The potential tax consequences of owning an ETF can be different than those experienced when owning mutual funds. While an ETF can make a capital gains distribution, they generally do not—unlike a mutual fund, which generally would make such distributions on an annual basis. ETFs can be traded like other exchange products using traditional stock-trading techniques and order types and are priced by supply and demand. Customers pay commissions, not sales charges.

Regarding different types of risk, which of the following is TRUE?

Enactment of, or changes in laws, represent potential legislative risk. -- The enactment of, or changes in, laws represent potential legislative risk, whereas enactment of, or changes in, regulations represent regulatory risk. Political risk is specific to potential political instability associated more with emerging economies.

Which of the following securities would most likely have the lowest expense ratio?

Exchange-traded fund -- Expenses tend to be lower than those of mutual funds, and the management fee is low as well. Remember that the portfolio is designed to track an index, and just as the securities contained in the index are change infrequently, so are the securities in the fund portfolio.

The United States Congress has authorized all of the following enterprises to issue securities EXCEPT

FDIC -- In addition to U.S. Treasury securities, the U.S. Congress authorizes certain agencies of the federal government to issue debt securities. These would include, GNMA, FNMA and FHLM. The Federal Deposit Insurance Corporation (FDIC) does not issues securities but is set up to insure bank deposits in the event of bank failure.

For preferred shares, the annual dividend payment is?

Fixed and stated as a percentage of its par value. -- A prefer stock's annual dividend payment is its fixed rate of return,

Which is the most common way investors pay a mutual fund's sales charge?

Front-end load -- The front-end load is the most common way a mutual fund's sales charge is paid. The sales charge is paid at the time of purchase. Front-end load, or Class A, shares have lower expenses than other classes, because the fund does not have to keep books on sales charge payments. It's already taken care of.

At the time of a limited partnership's dissolution, who is the last to be paid?

General partners

Under the Investment Company Act of 1940, which of the following is NOT considered and investment company?

Hedge fund -- Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). Hedge funds are organized as private investment companies, which are excluded under the definition of investment company und the Act of 1940.

For a real estate DPP, which of the following is TRUE?

Income can be derived from rents received for the properties. --- For real estate DPPs, both income and capital growth are possible. Income comes from the property rents received, and capital growth would come from the appreciation of the properties.

For revenue bonds issued by a state or municipality, which of the following is TRUE?

Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. --- Revenue bonds are not backed by the full faith and credit of the municipality that issues them. Instead, they are backed by the revenue produced by the project or facility that they support. In that light, the revenue must be large enough to cover the interest and principal payments if those obligations are to be met.

A hedge fund is permitted to do which of the following that a mutual fund is NOT permitted to do?

Invest in commodities and currencies -- All the answer selections are applicable to both hedge funds and mutual funds except investing in commodities and currencies. Mutual funds are limited to investing in securities only. While commodities and currencies can be investments, they are not securities.

At the time of dissolution, which of the following regarding a limited partnership is TRUE?

Limited partners are paid before general partners. -- When a limited partnership (LP) is dissolved, limited partners are paid before general partners. Remember that with an LP, all tax consequences are passed on to the partners. Therefore, it is the individual partners who may incur a tax liability to be paid to the IRS, not the partnership entity.

Which of following securities is least likely to have an active trading market?

Limited partnership interests -- A disadvantage to limited partnership interests is the lack of liquidity. Of the choices above, direct participation programs such as limited partnership interests are generally deemed illiquid. Whereas municipal debt securities, preferred stock, and REITs are often freely traded in their respective marketplaces.

Regarding filing for corporate bankruptcy, which of the following is TRUE?

Liquidation means that property will be taken and sold to repay all debts. -- The primary difference between a reorganization and a liquidation is that in a reorganization, the corporation can keep property and continue doing business. Liquidation means that all property will be taken and sold to repay all debts.

Which of the following statements about listed options is TRUE?

Listed options settle on the next business day after the trade date (T+1). -- Listed options settle on the next business day after the trade date (T+1). Whether long or short a call option contract is deemed in-the-money when the market price of the stock is above the strike price by any amount. However, an option that is in-the-money may not necessarily be profitable. For example, if a call option were purchased at 3 but in-the-money by 2, there would be a loss of 1 if the option were closed (sold) at or near expiry.

An example of securities that are established by states to provide other government entities such as cities, towns, school districts or state agencies with a short-term investment vehicle to invest funds include

Local Government Investment Pools -- Local government investment pools (LGIPs) are established by states to provide other government entities within its borders such as cities, counties, school districts or other state agencies with a short-term investment vehicle to invest funds.

Which of the following are fixed at the time a bond is issued?

Nominal yield -- Coupon, nominal, or stated yield is set at the time of issue and is a fixed percentage of the bond's par value.

If an investor is long an option contract and wishes to exercise the contract, the investor notifies the broker-dealer, who then notifies

OCC -- The investor who is long will notify the broker-dealer to exercise. The broker-dealer will then notify Options Clearing Corporation (OCC).

Past-due dividends on cumulative preferred shares

Past-due dividends on cumulative preferred shares --- Past-due dividends on cumulative preferred stock accumulate on the company's books until the corporation's board of directors decides to pay them. When the company resumes dividend payments, cumulative preferred stockholders receive current dividends plus the total accumulated dividends in arrears (those that were missed) before any dividends may be distributed to common stockholders. Common shareholders have no claim on preferred dividends.

An investor chooses to have a portfolio made up of domestically listed U.S. securities only. In so doing, this investor is primarily avoiding which of the following 2 risks?

Political and currency --- By having a portfolio made up of only domestically listed U.S. securities, the investor is primarily avoiding political risk and currency risk. Political risk is attributable to political instability, rarely associated with U.S. domestic markets. Currency risk is most prevalent when buying or selling involves a foreign currency that can fluctuate in value against the U.S. dollar. While these 2 are avoided, the investor could still be exposed to each of the other risks listed here.

Which of the following would have no effect on the NAV per share of a mutual fund share?

Portfolio securities had to be sold for a big capital loss. -- Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.

Which of the following is an example of an equity security?

Preferred shares -- Both common and preferred shares are equity securities. Each of the other choices represents a debt instrument.

Which of the following is an example of an equity security?

Preferred stock --- Common and preferred stock are examples of an equity security. Bonds of any type by comparison are certificates of indebtedness—debt instruments.

Short-term securities that generate funds for a municipality that expects alternate longer-term financing include all of the following EXCEPT:

REITs -- Tax anticipation notes (TANs) for example are used to finance current operations in anticipation of future tax receipts. This helps municipalities to even out cash flow between tax collection periods. Similarly, BANs, bond anticipation notes will be converted to long-term financing through the sale of bonds and so on. REITs are not a municipal security. They issue shares of beneficial interest in a trust set up for real estate investment.

What method is used to assign exercise notices to broker-dealers with short positions by Options Clearing Corporation (OCC)?

Random-selection basis -- The OCC assigns exercise notices to short broker-dealers (those with customers who are short) using a random-selection basis only. Broker-dealers, however, may then assign exercise notices to their short customers on a random basis, on a first in, first out (FIFO) basis, or any other method that is fair and reasonable.

Which of the following securities are nonexempt from registration under the Securities Act of 1933?

Real estate investment trusts and corporate equity issues -- Real estate investment trusts (REITs) are nonexempt securities subject to the registration and new issue disclosure provisions of the Securities Act of 1933. Agency issues, U.S. government issues, and municipal securities are exempt.

For municipal debt issues, which of the following is TRUE?

Revenue bonds are self-supporting, while GO bonds are backed by the municipality's good faith and credit. --- Revenue bonds are self-supporting. The project or facilities revenue supports the debt service of the bond. GO bonds are backed by the municipality's good faith and credit, namely the municipality's authority to tax.

Which of the following would be included in a mutual fund's list of expenses?

Shareholder records and service Investment advisor's fee --- Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor.

Which of the following positions would give an investor an unlimited loss potential?

Short 100 shares of IBS stock Short 1 IBS Jul 50 uncovered call -- A short stock position gives an investor unlimited risk potential if the stock should rise because the investor must eventually buy back the stock at the higher price. Because stock can rise an unlimited amount, there is unlimited risk. The sale of a naked call requires that, if exercised, the writer must buy the stock in the market and deliver it at the strike price. Again, because the stock can rise to some unlimited price, the position carries unlimited risk.

Your client has a long-term investment time horizon and is willing to accept some risk to achieve a better rate of return. Of the following, which would be the least suitable recommendation?

T-bills and negotiable CDs -- Given the long-term investment time horizon and the willingness to accept some risk to earn better returns, the lease suitable recommendations would be short-term money market instruments, such as T-bills and negotiable CDs where the trade-off for safety is return.

Which of the following is TRUE regarding money market securities?

T-notes and T-bonds can be considered money market instruments when they have only a year left to maturity. -- Only T-bills, because they have maturities of one year or less, are considered money market securities at the time of issue. However, though issued with longer maturities, both T-notes and bonds are considered money market instruments once they have only a year left to maturity.

What does the mortality guarantee of a variable annuity insure?

That payments will continue for the life of the annuitant --- The mortality guarantee of a variable annuity, which the insurance company assumes as part of mortality risk, insures that payments will continue for the life of the annuitant. It does not guarantee the size of the payments.

MMS Corporation has 7% callable preferred shares outstanding. Over the past few years, benchmark interest rates have declined and hovered close to 3%. Which of the following is TRUE?

The 7% shares are likely to be called. --- When interest rates fall, callable preferred shares are likely to be called. This allows the issuer to cease the higher dividend payments and reissue shares with lower dividend payments that align more with the current interest-rate environment. With interest rates now at 3%, the issuer would have no desire to issue more 7% shares, nor could they reduce the fixed dividend on these 7% shares. If the shares were convertible, conversion would be at the discretion of the shareholders, not the issuer.

Which of the following would you expect to have the lowest expense ratio?

The ABC Corporate Bond Fund -- Bond mutual funds typically have lower expense ratios than stock funds, which tend to be riskier and require more sophisticated investment strategies. The ABC Bond fund is the only bond mutual fund listed. Growth funds involve equities (stock), and of course, the stock income fund specifies equities as well.

Which of the following is TRUE for exchange-traded funds (ETFs)?

The SEC has classified them as a type of open-end fund, and they have operating costs and expenses that are lower than most mutual funds. --- The SEC has classified exchange-traded funds as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds.

A customer buys a 10% bond with a current yield of 12% and holds the bond until 1 year before maturity. The bond is sold when current interest rates are 8%. Which of the following statements are CORRECT?

The bond was purchased at a discount. The bond was sold at a premium. --- When the current yield (12%) is higher than the coupon (10%), it means the bond was purchased at a discount. Because the question tells us that current interest rates are now 8%, the bond maturing within a year with a 10% coupon would now be able to be sold at a premium.

In an LP, which of the following is TRUE?

The partnership entity is not responsible for paying taxes on gains. -- Both gains and losses from an LP flow through to the individual partners. Gains are taxable, and any taxes due are the responsibility of the individual partners, not the partnership entity.

Mr. Smith bought an ADR in a French company at $13.03 and recently sold the shares for $24.88. How would this trading profit be taxed?

The profit is taxed as a capital gain in the U.S. only -- Any trading profits (capital gains) from an ADR would only be taxable here in the United States. A capital gain is the profit realized when buying then selling the shares. Remember, dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability.

A customer of a broker-dealer makes it known that they would like to trade options in their account. The first step to accommodate the request is which of the following?

The registered representative should determine the suitability of options trading for the customer. --- Once the customer request being able to trade options in their account, the first step would be for the RR to collect all necessary information (financial and nonfinancial) to determine if trading options would be suitable for the customer.

A shareholder feels strongly about some of the issues to be voted on at the next shareholder meeting but is unable to attend. Which of the following is TRUE?

The shareholder can vote by proxy. -- If unable to attend a shareholder meeting, shareholders can vote by an absentee ballot, known as a proxy. Delivery of the proxy can be made online or by mail.

A registered representative opens a new options account for a customer. In which order must the following actions take place?

The steps or order of events to open an options account would occur in the following order: obtain essential facts about the customer, give the customer an options disclosure document, have the manager approve the account, enter the initial order, and have the customer sign the options agreement within 15 calendar days.

Which of the following regarding established customers of a broker-dealer and the purchase of penny stocks are TRUE?

They are exempt from the suitability statement requirement. 2. They are not exempt from the disclosure rules. -- An established customer is one who has effected a non-penny securities transaction or made a deposit of funds or securities into the account at least 1 year before the proposed penny stock trade or has made 3 purchases of penny stocks on 3 separate days involving 3 separate issues. Established customers are exempt from the suitability statement required but are subject to the disclosure rules.

Which of the following is TRUE regarding no-load shares?

They have fees associated with sales and redemptions. --- No-load shares have fees that are not considered sales charges, but rather service fees, purchase fees, redemption fees, and so on. Some fees, especially some of those levied at redemption, may look like sales charges but are not—hence, the term "no-load shares."

A municipality wants to issue GO bonds that will put it over its statutory debt limit. Which of the following is TRUE?

They may do so with voter approval. -- The amount of GO debt that a municipal government may incur can be limited by state or local statutes to protect taxpayers from excessive taxes. In order to issue bonds that would exceed this borrowing limit voter approval would be needed—that is, the approval of those who would be paying the taxes.

Which of the following is best describes the trade execution of ADRs?

Trades are executed domestically in U.S dollars. -- ADRs are often listed on a securities exchange such as the NYSE or Nasdaq and trade throughout the day. Trades in these securities are dollar denominated. ADRs trade and settle in the same fashion as a traditional U.S.-based common stock.

Which of the following is a debt instrument that pays no periodic interest?

Treasury STRIP -- STRIPS are Treasury bonds with the coupons removed. With no coupons, STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.

Each of the following makes regular interest payments EXCEPT

Treasury STRIPS -- Treasury STRIPS have the coupons removed and therefore do not make regular interest payments. Each of the remaining answer choices pays interest on a semiannual basis.

A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are

Treasury receipts -- Brokerage firms can create a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds placed in trust at a bank. They then sell separate receipts against the principal and coupon payments the notes and bonds represent.

All of the following securities are backed by the full faith and credit of the U.S. government EXCEPT

Treasury receipts --- Treasury receipts are issued by broker-dealers, and they are backed by the good faith and credit of those that issue them. Treasury STRIPS are the U.S. Treasury Department's version of these, and therefore they are backed in full by the U.S. government. Treasury bills, notes, and bonds are backed in full by the U.S. government.

In safety of principal, municipal bonds are considered second only to

U.S. government and agency bonds -- Municipal securities are considered second in safety of principal only to U.S. government and agency issues.

Under which of the following conditions will an investor be able to purchase mutual fund shares and pay no sales charge?

Under the automatic reinvestment privilege -- A mutual fund investor may receive up to 5 payments during the year: 4 dividend distributions and a long-term capital gains distribution. The investor may choose to have the payments automatically reinvested in the fund rather than distributed to them. In this case, the shares are purchased with no sales charge. Note that choosing to reinvest does not limit the investor's tax liability. The investor will still have to pay income tax on the dividend distributions and capital gains tax on the capital gains distribution, because the investor is considered to have enjoyed constructive receipt of the payments.

For ETFs, the phrase "tax efficiency" can best be described by which of the following concepts?

Usually, for ETFs, there are no tax consequences for investors until the shares are sold. -- The single greatest advantage associated with ETFs is the fact that while they can pass on capital gains from time to time, creating tax consequences in that year, they rarely do. Therefore, there would be no expected tax consequences until the shares are sold. This is the tax efficiency generally associated with ETFs.

Your customer has purchased 1 February 35 call at 2 on Tuesday, December 4. This transaction will settle on?

Wednesday, December 5. -- Options transactions settle on the next business day after the trade date, T + 1. In this case, an option transaction occurring on Tuesday, December 4, would settle on Wednesday, December 5.

T-bills are issued (auctioned) by the U.S. Treasury Department how often?

Weekly --- Treasury bills (T-bills) are issued (auctioned) by the U.S. Treasury weekly.

Of the following strategies, which is considered most risky in a strong bull market?

Writing calls -- Short (writing) calls are bearish and have an unlimited maximum loss potential. In wanting the stock to go down, one's risk is that the underlying stock goes up and, in theory, could go as high as infinity.

A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is TRUE?

YTC is the same as YTM. -- This bond was purchased at par. If a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

A company's business operations are overseen by

a board of directors elected by shareholders -- Most corporations are organized in such a way that their stockholders regularly vote for and elect individuals to a board of directors (BOD) to oversee company business operations.

All of the following statements are true EXCEPT

a bond mutual fund may issue bonds -- A bond mutual fund invests in the bonds of other companies. It may not itself issue bonds or preferred stock. They can only issue common shares. Closed-end companies are much like any other company. They may issue bonds and preferred stock, once they have sold common stock and become a publicly traded company.

A put feature attached to a bond allows

a bondholder to put a bond back to the issuer for redemption at times that will benefit the bondholder -- A put feature attached to a bond allows a bondholder to put a bond back to the issuer for redemption before maturity. Bondholders will do this when interest rates have risen. For example, if a bondholder has a bond paying 4% and interest rates have risen to 6%, why settle for a 4% return when prevailing market rates are now up to 4%? Better to put the 4% bond back to the issuer for redemption and then purchase a new bond paying the prevailing higher rate. Obviously, the ability to put the bond back to the issuer benefits the bondholder.

A written promise made by a corporation to pay the principal at its due date and interest on a regular basis on one of its debt issues but backed by no physical assets or titles to assets could only be

a debenture -- A debenture is a debt obligation of a corporation backed only by its word and general creditworthiness. Debentures are written promises of the corporation to pay the principal at its due date and interest on a regular basis.

An investor has entered into a contract to pay an investment company a specific sum of money in exchange for the company's agreement to pay the investor a specific (larger) sum of money on a specific date in the future. The investment company must be

a face-amount certificate company. -- A face-amount certificate company offers the investor a certificate with a face amount on it. The investor buys it for a discount from the face amount, with the agreement being that the company will pay the investor the face amount on a specific date in the future.

With money market securities held in one's portfolio, relative to other, longer-term debt securities, an investor should expect

a higher degree of safety with lower returns -- Because of their short-term maturities, money market securities are considered highly liquid and provide a relatively high degree of safety. In return for the safety, investors forgo a higher return for the lower returns generally associated with money market securities.

An investor has purchased bonds having a put feature attached. With this put feature, it is likely that these bonds were issued with

a lower coupon than similar bonds without the feature --- When bonds are issued with features that benefit the bondholder, such as a put feature, the issuer can generally pay a slightly lower coupon rate of interest. This is because the put feature compensates the holder in another way, aside from the coupon rate.

Treasury bond (T-bond) interest is stated as

a percentage of par value -- Like Treasury notes (T-notes), Treasury bonds (T-bonds) have interest stated as a percentage of par value. Example: Par value $1,000, with 4% interest equals $40 interest per year (0.04 × $1,000 = $40).

All of the following are issuer transactions where the proceeds of the offering go to the issuing company EXCEPT

a repurchase agreement (REPO) --- APOs (additional public offerings), IPOs (initial public offerings), and SPOs (subsequent public offerings) all result in funds going to the issuer and are, therefore, issuer transactions. A REPO is a money market instrument where money changes hands between the buyer and the seller.

When Options Clearing Corporation receives a notice to exercise, it will assign that notice to

a short broker-dealer -- The exercise and assignment process is as follows: A long customer notifies its broker-dealer (long broker-deal). The long broker-dealer notifies OCOCC then assigns the short broker-dealer, who will then in turn assign its short customer.

Limited partnerships sold through private placements involve

a small group of investors, each contributing a large sum --- Limited partnerships sold through private placements generally consist of a small group of accredited investors, each contributing a large sum to the partnership.

In order for a business entity to qualify as a limited partnership, the LP must have

at least one general partner and one limited partner --- Limited partnerships are required to have at least one general partner and one limited partner.

If a call contract has no intrinsic value, it must be

at, or out of the money -- If a contract has no (zero) intrinsic value, it can only be either at or out of the money. Anytime a contract has intrinsic value, it is in the money by that amount.

MOS stock is trading at 55. A March 55 call contract would therefore be trading

at the money --- When an option contract strike price is the same as the underlying stocks current market value, the contract is right at the money. When a contract is right at the money, it has no (zero) intrinsic value.

Hedge funds attempt to

achieve high returns and are, therefore, associated with high-risk investments -- While hedging is the practice of attempting to limit or mitigate risk, most hedge funds specify generating high returns as their primary investment objective. In attempting to achieve these returns, they tend to entail a substantial amount of risk for those who own shares.

In explaining hedge funds to an investor, a registered representative might correctly characterize them as utilizing

advanced and complicated strategies entailing high risk --- Hedge fund portfolios are aggressively managed in an attempt to achieve high returns. To do so they utilize advanced and complicated strategies generally associated with high risk.

In the event that a liquidation needs to occur, subordinated debtholders

agree to be paid back last of all debtholders -- In the event that a liquidation needs to occur, though they are still senior to all equity holders, subordinated debtholders agree to be paid back last of (subordinate or junior to) all debtholders.

Rules regarding restricted persons state that each of the following is considered immediate family EXCEPT

an aunt or an uncle -- Rules regarding restricted persons define "immediate family" as spouses, parents, siblings, in-laws, and children. Aunts and uncles and grandparents are excluded (not considered immediate family).

Common shareholders have the right to receive an audited set of financial statements of the company's performance

annually -- While a company can supply this information as often as they want to shareholders, it is only required that an audited report be received on an annual basis.

An affiliate has held restricted shares fully paid for 6 months. In anticipation of the desire to divest the shares, the affiliate should know that

any shares sold will be subject to volume restrictions if still an affiliate --- Although held fully paid for 6 months, the sales of these shares would be subject to volume restrictions for as long as this individual is an affiliate. If the individual was not an affiliate, the shares held fully paid for 6 months could now be sold completely unrestricted.

T-bonds and T-notes

are both priced as a percentage of par --- Both Treasury notes and bonds are priced as a percentage of par. Interest on these is paid semiannually. Comparatively, T-bills are priced at a discount to par with the interest not paid until maturity (the difference between the discount paid and par value received).

Class B mutual fund shares are also known as

back-end load shares -- Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the "back end." Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after 5 years. At this time, they convert to Class A shares.

Put buyers are

bearish --- Put buyers have the right to sell the stock. Being in a position to sell the stock makes them bearish.

An investor who is long MES equity put options is

bearish on MES stock --- Those who buy equity put options have the right to sell the underlying stock, in this case MES stock. Being in a position to sell the stock makes the investor bearish on the stock. If the underlying goes down in value, the premium on the put will go up.

Advantages enjoyed by the limited partners in a partnership might be all of the following EXCEPT

being in a fiduciary position with responsibilities to others -- The fiduciary responsibility is borne by the GPs, not the LPs. The flow-through of income and expenses, limited liability, and having an investment managed by the GPs are all considered advantages for the LPs.

Securities issued by the U.S. federal government are classified as

bills, notes, and bonds --- Securities issued by the U.S. federal government are classified as bills, notes, and bonds that distinguish each issue's term to maturity (short, intermediate, and long term).

A registered representative provides financial support and housing at her home for her grandfather. Regarding the purchase of new issues,

both persons are considered restricted -- Working for a BD, the RR is considered restricted. While grandparents of restricted persons are generally not considered restricted, anyone being provided financial support and/or living under the same roof as a restricted person (as is the case here) is also restricted.

An investor sells (writes) put options on MAS stock. This investor is

bullish on MAS the stock -- Those who sell put options may be obligated to buy the stock at the strike price if the contract is exercised by the owner. Being in a position to own the stock makes the investor bullish on the stock.

An investor owns MMS call options. This investor is

bullish, hoping the stock will rise -- Call owners have the right to purchase the stock. Being in a position to buy (own) the stock make them bullish. Bulls want stocks to go up.

Exchange-traded funds are priced

by supply and demand where transaction prices may be higher or lower than the fund's NAV -- ETFs trade on exchanges and are priced by supply and demand, like any other exchange-traded product. With pricing influenced by market forces, transaction prices at any given time might be more or less than the fund's NAV.

An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor

can sell the shares unrestricted at any time -- Selling shares under Rule 144 effectively registers the shares. In other words, buyers of stock being sold subject to Rule 144 are not subject to any restrictions if they choose to resell.

The risk when investing, where one has the potential to lose all or part of the investment due to circumstances that are unrelated to the issuer's financial strength or well-being, is known as

capital risk -- This is the definition of capital risk. For example, capital risk might be least when investing in securities backed by the federal government but much more prevalent when investing in derivative products.

The risk that all or a significant portion of the sum invested might be lost is known as

capital risk --- Particularly when taking aggressive positions, such as in options or DPPs, there is a greater likelihood that a substantial portion of the initial investment can be lost. This is best described as capital risk.

Preferred shares have

characteristics of both equity and debt securities -- Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond (debt security).

An issuer of bonds can be

corporate and both the federal and municipal governments -- Debt instruments (bonds) can be issued by corporations, and both federal and municipal government entities.

Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own

cumulative preferred stock --- Cumulative preferred stock accrues payments due its shareholders that have been missed in the event dividends are reduced or suspended.

When investing in overseas markets in foreign securities, investors should be aware of and understand

currency risk -- Whenever investing in securities issued in non-U.S. markets, investors need to be sensitive to the different risks that might apply to foreign investments. Of those listed here, currency risk should be of concern. Currency risk is the possibility that an investment denominated in a foreign currency could decline for U.S. investors if the value of that currency declines in its exchange rate with the U.S. dollar.

A company has distributed profits to its shareholders. This type of distribution would most likely be in the form of

dividends -- The distribution of profits to shareholders would generally be in the form of dividends to be received at the discretion of the board of directors (BOD). Bonds and warrants are other types of securities a company might issue, while options are a derivative product that would not be issued by the company.

Common dividends may be

declared, increased, reduced, or suspended by the board of directors -- Common dividends may be declared, increased, reduced, or suspended at the discretion of the board of directors (BOD). Shareholders have no vote on these dividend matters.

The allowable deduction for equipment used in an oil and gas direct participation program is taken as

depreciation over the life of the program -- Tangibles such as equipment that will have some salvage value at the end of the program can be depreciated. The depreciation is an allowable deduction taken over the life of the program.

With interest rates in the marketplace at 7%, it could be expected that in the secondary market, a bond carrying a 5% coupon would trade

downward in price --- While bond prices like those of other securities are impacted by supply and demand, they also have a unique inverse relationship to interest rates. As interest rates rise in the marketplace, the prices of bonds trading in the secondary market will fall, and as interest rates fall in the marketplace, the prices of bonds trading in the secondary market will rise.

Political risk is more associated with

emerging economies, but could occur even in highly developed ones -- While political risk, the potential instability in the political climate of a country or market, is mostly associated with emerging economies, it must be recognized that it can occur even in highly developed ones as well.

A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are

equipment trust certificates --- Debt securities issued by corporations backed by the assets the corporation owns and uses in its daily business are known as equipment trust certificates.

Par value for a bond is also known as

face value or the amount a bond will be redeemed for at maturity -- Par value (usually $1,000) is the face value of a bond or the amount a bond will be redeemed for by the investor at maturity.

A Federal Reserve member bank's deposits in excess of the amount required to be on reserve are known as

federal funds -- The Federal Reserve Bank (FRB) mandates how much money its member banks must keep on reserve at the FRAny deposits in excess of the required amount are known as federal funds.

Money market instruments are typically

fixed-income (debt) securities with short-term maturities -- Money market instruments are fixed-income (debt) securities with short-term maturities, typically one year or less.

Limited partnership programs are categorized as direct participation programs. The term direct participation refers to the

flow-through of profits and losses of the partnership to the individual limited partners -- Understanding the flow-through concept is critical with DPPs. Only DPPs allow flow-through of losses.

A convertible feature for preferred shares allows the owner to exchange the shares

for a fixed number of shares of the issuing corporation's common stock --- The conversion feature for preferred shares has fixed terms allowing the owner to convert the shares (exchange them) for a specified number of the same issuers common shares.

Class A mutual fund shares are also known as

front-end load shares --- Class A mutual fund shares have their sales charge paid at the time of purchase, or at the "front end." Hence, they are known as front-end load shares.

An investor is short 1 XYZ January 20 call at 3. This investor

has received $300 for writing the call contract -- An investor who is short 1 January 20 call at 3 has received $300 premium to write (sell) the call. Being short the call (sold), the investor will be obligated to sell 100 shares of XYZ stock if the contract is exercised at the strike price ($20). Remember that only the owner, the buyer or the party who is long can exercise the contract.

An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell

immediately, subject to Rule 144 volume limitations --- Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144.

An accredited investor is one who meets

income or net worth criteria with substantial investment experience -- Investors in limited partnerships offered in private placements as opposed to those being offered publicly must be accredited investors. The generally accepted definition of an accredited investor is one who meets designated annual income or net worth criteria, and has substantial investment experience.

An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity

increases -- A $1,000 par value bond purchased at $725 is bought at a discount to par. Whenever a bond is purchased for an amount less than will be received at maturity ($1,000 par), the discount initially paid increases the return. In other words, in addition to receiving the coupon interest payments, the investor will also receive at maturity an additional $275 more than the $725 paid when the bond matures.

The effect of continually rising retail prices on the investment returns of one's portfolio is best described as

inflation risk --- Inflation, or continually rising prices, reduces the purchasing power that one's investment returns will have. This is the essence of inflation risk.

Each of the following are likely benefits of owning shares of common stock EXCEPT

interest payments -- Interest payments are paid to bond holders but not on common stock. Common shareholders may receive dividends if declared by the board of directors. They may also expect to vote on certain critical issues facing the company such as its leadership. Common shareholders have a liability limited to the amount invested.

U.S. Treasury notes are U.S. government-issued

intermediate-term debt securities with maturities of 2-10 years --- Treasury notes (T-notes) are U.S. government-issued intermediate-term debt securities having maturities of 2-10 years.

A guaranteed bond

is debt backed by another company, such as a parent company -- Guaranteed bonds are backed by a company other than the issuing corporation, such as a parent company. The value of the guarantee is only as good as the strength of the company making that guarantee (good faith and credit) because no physical assets back the bonds. Hence, these are unsecured debt instruments.

Mrs. Jones is an employee of a member firm and as such is a restricted person regarding the purchase of new issues. She belongs to an investment club and has a 1% interest in the club's brokerage account. The investment club

is not a restricted account and will be allowed to purchase equity shares of an IPO -- Because the restricted person's interest in the club's brokerage account does not exceed 10%, the investment club account is not considered a restricted account. If not restricted, the club can purchase shares of an equity issue at the public offering price if it chooses to.

A statutory debt limitation imposed on a municipality restricts its authority regarding

issuing general obligation (GO) bonds --- A municipality may be limited by statute regarding the amount of GO debt it may incur, thus limiting the GO bonds it can issue.

Securities issued by the U.S. government are backed by

its full faith and credit, based on its power to tax the people --- Securities issued by the U.S. government are backed by its full faith and credit. The promise to pay is based on the federal government's power to tax the people, as well as to print currency when it needs to.

For investors, changes made to the tax code by the IRS are known as a form of

legislative risk -- Legislative risk results from changes in the law, not regulations. Changes in tax laws are one example.

A client has established a long put position. The contract will have intrinsic value when the price of the underlying stock is

less than the exercise price -- Put buyers are bearish and want the underlying stock to fall in value. Puts give the owner the right to sell at the contract's exercise (strike) price. Therefore, the put contract will pick up intrinsic value if the price of the underlying stock falls below the contract's strike price. The long put position will become profitable if the stock falls below the strike by more than the amount of the premium paid.

Class C mutual fund shares are also known as

level-load shares --- Class C mutual fund shares have no sales charge at the time of purchase, but have a percentage of their value withdrawn from the customer's account every quarter. The percentage, which can be as high as 0.75% of the value of the account, never ceases. The charge remains as long as the account does—it remains "level"—hence, the shares are known as level-load shares.

Common shareholders have the right to

limited access to a company's books and records -- By virtue of owning the company's common stock, shareholders have a limited right to review the company's books and records. For example, they have the right to examine the minutes of meetings of the board of directors.

Short-term purchases and sales of a mutual fund to take advantage of price fluctuation is known as

market timing -- The practice of market timing in mutual funds is not illegal but is rarely advantageous. Because many purchases and redemptions are involved over relatively short time periods, the sales charge lost each time the investor buys or redeems precludes making much in the way of profits. Most mutual funds in fact prohibit the practice.

Bonds can be issued with additional features attached, making them more attractive to investors. All of the following can be considered such features EXCEPT

maturity -- The features most commonly attached to a bond issue would be having the bond be callable, puttable, or convertible. Each of these features in its own way might make the issue more attractive to an investor. All bonds have a stated maturity, and as such, this would not be considered an additional feature.

Repurchase agreements and reverse repurchase agreements are

money market instruments -- Repurchase (repo) agreements and reverse repurchase agreements are short-term debt securities and are, therefore, a type of money market instrument.

For real estate program partners, tax deductions will be derived from

mortgage interest paid and depreciation -- Deductions for real estate programs come primarily from mortgage interest paid on the properties and the depreciation allowable for the properties.

A state government has outstanding debt that it issued to finance toll roads, sports facilities, and public housing projects. All of these issues are examples of

municipal revenue bonds --- These are all examples of municipal revenue bonds, which are bonds issued to finance a project or facility with the bonds' debt service backed by the facility's revenue stream. The revenue might come from rents, tolls, or admission fees, among other sources.

Risks that are unique to a specific industry, business type, or investment type are known as

nonsystematic risks -- Nonsystematic risks are those that are unique to a specific industry, business enterprise, or investment type.

Municipal revenue bonds are?

not subject to statutory debt limits and do not require voter approval -- Municipal revenue bond issues are self-supporting. Given that they do not rely on taxes to support the debt service, they do not require voter approval. Nor are they subject to statutory debt limits as GO bonds are.

A member firm receives an order to purchase shares in a common stock IPO from another broker-dealer for a customer. Regarding restricted persons, the member must

obtain a written representation that the buyer is not a restricted person -- When receiving an order to buy a new equity issue, a member must obtain a written representation that purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons).

Section 529 plans are considered municipal fund securities. They must therefore be sold by

offering circular -- Municipal bonds are sold by offering circular, a document similar to a prospectus used in the sale of municipal securities. Because Section 529 plans are state sponsored, they must be sold by offering circular.

Regarding CDs and negotiable CDs issued by banks,

only negotiable CDs are considered money market instruments -- Banks issue and guarantee certificates of deposit (CDs) with fixed interest rates. Some that can be traded in the secondary market are known as negotiable CDs. Only these negotiable CDs are considered money market instruments.

A stock currently has a market value of $75 per share. If a put option on the stock has an exercise price of $60, the put option is

out of the money -- This put option has a zero intrinsic value and is therefore out of the money by the 15 points difference by which the market price exceeds the strike price. A put option has intrinsic value or is in the money when the current market price of the underlying asset is less than the exercise price (in this example, $60).

A preferred shareholder's priority claim on assets is the preferred shareholder's priority standing

over common shareholders --- A preferred shareholders priority claim on assets is the preferred shareholders priority standing over common shareholders only. Employees of the corporation, debt (bond) holders and other creditors would all have claims on assets settled before preferred shareholders.

When the board of directors (BOD) declares a dividend,

owners of preferred shares must be paid before any payment is made to common shareholders --- When the board of directors (BOD) declares dividends, owners of preferred shares must be paid before any payment is made to common shareholders. This is known as the dividend preference allotted to preferred shareholders. There is no relationship between the amounts paid to preferred shareholders and common shareholders.

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at

par value or higher -- In return for the call privilege, the corporation may pay a premium exceeding the stock's par value at the time of the call. It's reasonable that a shareholder would expect to receive at least par value or higher in the event of a call.

Treasury bills (T-bills) are...

short-term debt obligations issued weekly. -- Treasury bills are short-term debt obligations of the U.S. government issued weekly

A corporation that has issued cumulative preferred stock

pays past and current preferred dividends before paying dividends on common stock -- Dividends in arrears (those missed) on cumulative preferred have the highest priority of dividends to be paid. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest, however, is always paid before any dividends, preferred or common.

All of the following are true for 529 plans EXCEPT

plan donors must be related to the student benefactor -- Donors to 529 plans need not be related to the student benefactor. Each of the remaining statements is true.

An equity option call buyer has the right to

purchase stock and therefore is bullish --- Call buyers pay the premium for the right to purchase the stock at the strike price. Those who buy stock are bullish (anticipate that it will rise).

All of the following are nonsystematic risks EXCEPT

purchasing power risk -- Purchasing power or inflation risk is a systematic risk. Capital risk, business risk, and call risk, among others, are nonsystematic risks, those that portfolio diversification can help to reduce.

Inflation risk is most closely associated with

purchasing power risk -- When prices are rising (inflation), purchasing power is reduced. During inflationary periods, a dollar today often doesn't purchase the quantity of goods and services it purchased yesterday.

A REIT can avoid being taxed as a corporation would by

receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders -- Under the guidelines set by the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders.

For real estate program partners, tax credits will

reduce tax liability dollar for dollar -- Offered by the federal government for only certain types of real estate programs (not all), tax credits reduce tax liability dollar for dollar. In this light, credits are considered far greater benefits than deductions, which only reduce taxable income.

An investor has a bond maturing during a time when interest rates are falling. It is likely that the investor, wanting to keep the funds invested, would be most concerned with

reinvestment risk -- When interest rates are declining, it is difficult to invest proceeds from redemptions or distributions and maintain the same level of income one had previously without increasing credit or market risks. This is reinvestment risk.

Call risk is most closely associated with

reinvestment risk --- Call risk is the risk that a bond might be called before maturity. Often when this occurs, investors who receive their principal back sooner than anticipated are left to find ways to reinvest that will achieve the same returns—reinvestment risk.

Securities acquired through some means other than a registered public offering are known as

restricted --- Restricted securities are those acquired through some means other than a registered public offering. Securities purchased via a private placement are an example. These securities may not be sold (are restricted) until they have been held fully paid for 6 months.

All of the following are types of direct participation programs (DPPS) EXCEPT

retail distribution -- The most common types of direct participation programs are real estate, oil and gas, and leasing programs.

Banker's acceptances are

short-term time drafts issued by banks to corporations -- Used by corporations to finance international (foreign) trade, BAs are issued by banks to corporations. They are considered money market instruments because of their short-term maturities, generally no longer than 270 days (9 months).

The ratings on the debt instruments of a foreign country with outstanding loans from a number of other countries worldwide have been downgraded. The impact felt due to the risk of possible default is known as

sovereign risk -- While it can be noted that sovereign risk is a type of political risk, the risk of default by a country on its debt instruments is specifically recognized as sovereign risk.

A company's net worth belongs to its

stockholders -- A company's net worth (assets - liabilities) belongs to the business owners (its stockholders).

There are several types of investment risks that will generally fall into 2 categories. These categories are known as

systematic and nonsystematic --- The 2 categories of investment risks are systematic (the risk that change in overall economy will impact individual securities) and nonsystematic (those risks that are unique to a particular industry, business, or investment type).

Bonds can typically be issued with

term, serial, or balloon maturities --- The 3 types of maturities that bonds can typically be issued with are term, serial, or balloon maturities. Note that there is no "series" maturity type.

An investor holds a November 35 call that was purchased on March 3. The investor, if wanting to exercise the contract, would need to do so no later than

the 3rd Friday of November -- Options can be exercised up to and including (no later than) expiration. Options expire on the 3rd Friday of the expiry month. In this case, the 3rd Friday of November.

Listed options expire on

the 3rd Friday of the expiration month -- Listed options contracts expire on the 3rd Friday of the expiration month at 11:59 pm.

The rate on an adjustable preferred stock would most likely be indexed to

the Treasury bill (T-bill) rate --- The dividend on an adjustable-rate preferred stock is tied to a particular benchmark interest rate, and the Treasury bill rate is a common benchmark. The CPI, the PPI, and the DJIA are not interest rates.

When shareholders owning participating preferred shares receive the additional participating amount, this was determined by

the board of directors (BOD) --- Additional dividends in profitable years payable to participating preferred shareholders is at the direction of the board of directors (BOD). Just as a dividend is declared, the BOD would declare any participating dividend to be paid.

An investor purchases a T-bill for $9,925 that will mature at $10,000. The difference between the $9,925 paid and the $10,000 that will be received is

the discount to par and will be considered interest received at maturity -- T-bills are purchased at a discount to par. In this case, it is bought at $9,925, which is a $75 discount to the $10,000 par value to be received at maturity. Debt instruments pay interest not dividends, and the $75 difference between what was paid and what will be received is considered the interest paid on the T-bill at maturity.

While a branch office manager can initially approve an options account for trading, it must ultimately be approved by

the firm's ROP --- Initially, a branch office manager (BOM) can approve an options account. However, all options accounts must ultimately be approved by the firms registered options principal (ROP), and done so promptly.

Treasury receipts are backed by

the issuing broker-dealer --- Treasury receipts are issued by broker-dealers. Although Treasury securities (T-notes and bonds) are held in trust at a bank and collateralize the Treasury receipts, unlike Treasury securities backed by the U.S. government, these Treasury receipts can only be backed by their issuer, the issuing broker-dealer.

With a balloon maturity,

the major portion of the principal debt is paid on the final maturity date --- With a balloon maturity, the issuer repays part of the bond's principal before the final maturity date over scheduled serial maturity dates, but pays off the major portion of the bond principal on the final maturity date.

All of the following must be on the cover page or beginning of the summary prospectus of a mutual fund EXCEPT

the name of the investment advisor -- The summary prospectus, as the name implies, contains the important information about a mutual fund in summary form. The cover page must contain a standardized listing of certain information, including the fund's name, share classes offered, ticker symbols, information on how to get a full prospectus, a warning that the information is in summary form, and other facts. There is no requirement that the name of the investment adviser be on the cover page of the summary prospectus.

A variable annuity's investment return each month is based on

the performance of the separate account -- A key feature of the variable annuity is that the premium is invested into the insurance company's separate account rather than the general account. It is the performance of the separate account that provides the annuity's investment return each month. There are no guarantees as to the separate account performance or return each month.

An investor owns a bond carrying a 4% coupon. Interest rates in the marketplace have been moving downward and are currently at 2.5%. Given the current interest rates in the marketplace, this investor should see

the price of the bond move higher --- Prices of bonds trading in the secondary market have an inverse relationship to interest rates. As interest rates rise in the marketplace, the prices of bonds trading in the secondary market will fall, and as interest rates fall in the marketplace, the prices of bonds trading in the secondary market will rise. Once the coupon rate is established by the issuer, it remains unchanged throughout the life of the bond.

It would be expected that a repurchase (repo) agreement contract would include

the repurchase price and the maturity date --- A repurchase (repo) agreement contract would include the repurchase price (the price that the securities initially sold would be bought back at) and the maturity date (the date that the initial sale would be reversed). The return would be the difference between the initial sale price and the repurchase price.

Your customer has purchased an MJS October 35 call at 4. Their proof of ownership will be

the trade confirmation -- Options are issued by OCC and traded by investors without a physical certificate. The definitive proof of ownership is the trade confirmation—essentially, the document that confirms the purchase.

A hedge fund portfolio has been characterized as being highly leveraged. This means that

there is substantial borrowing or purchasing on margin -- While hedge funds can employ all these investment types and strategies, being highly leveraged means borrowing to purchase. Borrowing to purchase securities is typically known as buying on margin.

Once a corporate liquidation proceeding in court is underway, common shareholders know that

they are not guaranteed to be paid back any amount --- There are no guarantees in a bankruptcy proceeding that payment will be paid to anyone. Common shareholders, paid last of all claimants, if anything is left to be paid, should be acutely aware of this.

If a preferred shareholder received a $3.50 annual dividend each year, it could be assumed that

this is a 3.5% preferred class -- An annual dividend of $3.50 simply tells you that this is a 3.5% preferred class of stock (3.5% × par ($100) = $3.50) or ($3.50 / par ($100) = 0.035). The current market value is not used to calculate the fixed dividend, nor does this dividend amount tell us what common shareholders received.

An individual owning shares of a corporation's common stock would have all of the following rights EXCEPT

to declare dividends --- Common shareholders have a number of rights. While they may receive dividends, declaring dividends is a function of the board of directors (BOD).

All of the following are rights of limited partners in a DPP EXCEPT

to make day-to-day business decisions -- Limited partners (LPs) have a number of rights, among them, to vote on business objectives, to inspect all books and records, and if the GPs are not acting in their best interest, to sue them. Making day-to-day business decisions is the responsibility of the GPs, and if an LP were to do so, they could lose their standing as an LP.

A member firm is assigned an exercise notice by the Options Clearing Corporation. The member firm may assign the exercise notice to one of its short customers by any of the following methods EXCEPT

to the customer having the largest short position --- While OCC can assign exercise notices using only the random-selection basis, a member firm may use any method that is fair and reasonable. The 2 most common methods are first in, first out (FIFO) and random selection.

An investor is long a January 30 call at 2. Maximum gain for this position is

unlimited -- For a long call option, the maximum gain potential is unlimited because the underlying stock can rise to some unlimited number—in theory, infinity. As the stock price rises, so too would the value of the call.

An investor is short a January 30 call at 5. Maximum loss for the investor is

unlimited -- Maximum loss for a short call is unlimited. This could occur because the underlying stock can rise to some unlimited number.

An investor establishes the following position: Long 1 XYZ September 40 call at 2. Utilizing this position, the maximum potential gain for the investor is

unlimited --- Long calls are bullish positions. The investor wants to see the stock go up in price. The maximum gain on a long call is unlimited because, in theory, the underlying stock's price can go to infinity and is, therefore, also unlimited.

In a real estate limited partnership (DPP), the general partner has

unlimited liability and an active role -- In limited partnerships, whether real estate or other types, the general partner is the active partner managing the business and taking on unlimited liability.

Investors in hedge funds should know that the funds are

unregulated but must abide by laws that investors be accredited -- Although hedge funds are unregulated (no SEC registration is required), there are laws requiring that those who purchase shares of hedge funds be accredited investors. That is, they must meet minimum annual income and net worth criteria, as well as have considerable investment knowledge.

Holders of subordinated debt instruments know that in the case of a corporate liquidation, they

will be paid back last of all debtholders -- In the event of a corporate bankruptcy, subordinated debtholders, while having no guarantees of being paid, would come last of all bondholders in the liquidation priority—subordinate.

An investor has purchased Class A mutual fund shares. The NAV (net asset value) per share of the fund is the price the investor

will receive upon redemption of the shares -- The NAV per share of a mutual fund is calculated by dividing the net assets of the fund by the number of shares outstanding. When purchasing Class A shares, NAV plus a sales charge is paid. When redeeming the shares, the investor simply receives NAV. Remember that for purchases and redemptions of mutual fund shares, the next calculated NAV per share is used, a practice known as forward pricing. Therefore, when purchasing or redeeming shares, because mutual funds use forward pricing, the investor can never be certain of the exact price that will be paid or received when entering the order.

Regarding the sale of a new issue, a customer is considered a restricted person if the person is

working as a salesperson who works for the issuing firm's underwriter --- Restricted persons include FINRA member firms and their associated persons, such as a salesperson working for an underwriter, plus immediate family members. Immediate family members do not include aunts and uncles or grandparents.