SIE ( Understanding Products and Their Risks ) and (Understanding Trading, Customer Accounts, and Prohibited Activities)
Distinguishing between a sell stop order and a sell stop limit order, which of the following are true? The sell stop limit order becomes a sell limit once triggered. The sell stop order becomes a sell limit order once triggered. The sell stop limit order becomes an order to sell at the market triggered. The sell stop order becomes an order to sell at the market triggered. A) I and IV B) II and IV C) I and III D) II and III
A SSL to SL SSO to OS Explanation Stop orders become market orders once triggered, and stop limit orders become orders to sell at the specified limit once triggered. Stop or stop limit orders can be either buys or sells.
The owner of a listed put equity option has the right to A) sell the stock at the strike price. B) sell another put at a premium. C) buy another put at discount. D) buy the stock at the strike price.
A ( The owner of a put (long) purchased the right to sell (to put) the stock at the strike price to those who are short the option. The exercise of their put is an instruction to assign the writer of the put, meaning the writer (short) must fulfill their obligation to buy the stock at the strike price.
An investor makes several statements regarding what they know about exchange-traded funds (ETFs). All of them are correct except A) I can't buy them on margin because they represent an entire basket of stocks like mutual funds do. B) I can expect them to have lower expense and operating costs than mutual funds. C) I'll be able to buy or sell them throughout the trading day like stocks trading on an exchange. D) I won't have to pay any sales charges as I do with mutual funds, but I will have to pay commissions.
A (Exchange on margins) Explanation Though mutual funds cannot be purchased on margin, ETFs can be. They can be traded throughout the trading day with purchases and sales commissionable transactions. They tend to have low expense ratios.
Municipal securities can be issued by A) states and local governments. B) U.S. Treasury and local governments. C) corporations and local governments. D) states and the U.S. federal government.
A (No FED) Explanation Municipal securities can be issued by state or local governments or by U.S. territories, authorities, and special districts.
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 A) immediately, subject to Rule 144 volume limitations. B) under Rule 144 only after a six-month holding period. C) only after leaving (becoming unaffiliated with) the company. D) immediately, with no volume restrictions.
A (OPEN MARKET, open to go) IF PRIVATE THEN HOLDING Explanation 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.
A member firm is assigned an exercise notice by the Options Clearing Corporation (OCC). The member firm may assign the exercise notice to one of its short customers by any of the following methods except A) to the customer having the largest short position. B) on a random-selection basis. C) in any way that is fair and reasonable. D) to the customer having the oldest short position.
A (RANDOM OR FIRST OUT) Explanation While the OCC can assign exercise notices using only the random-selection basis, a member firm may use any method that is fair and reasonable. The two most common methods are first in, first out (FIFO) and random selection.
Who is responsible for meeting the desired returns on a defined contribution plan? A) The employee B) The custodian C) The Pension Benefit Guaranty Corporation D) The sponsor
A (employee chooses investment and responsibility of returns Explanation The employee chooses how the money is invested, so the employee takes responsibility for the returns.
All of the following are exempt from Regulation T except A) NYSE-listed securities. B) T-bill. C) GNMA. D) New York City bonds.
A (exchange)
Which of the following bonds trade flat (without interest) unless interest payments are declared by the board of directors (BOD)? A) Income bonds B) Mortgage bonds C) Debentures D) Callable bonds
A (flat income/adjustment) Explanation Bonds that trade flat (without interest), unless the payments are declared by the BOD, are income bonds (also known as adjustment bonds).
Craig and Judy have just married. It is a second marriage for both of them and they both have kids from a prior marriage. Craig would like his portion of their account to go to his kids when he dies and Judy would like her portion to go to her kids when she dies. As new partners in marriage, while they are both alive they would both like to have full access to the account. What type of account(s) should they set up? A) Joint tenants in common (JTIC) B) A partnership account C) Each should set up their own individual transfer on death (TOD) account with limited power of attorney (POA) D) Joint tenants with rights of survivorship (JTWROS)
A (joint but different kids) The JTWOS does not separate their assets at death; instead the whole account would go to the surviving spouse.
All of the following would be advantages of a limited partner in a DPP except A) participate in the management of the business. B) cash distributions of capital gains. C) cash distributions of earning. D) deductions for business expenses.
A (limited partners don't manage buisness)
If a margin deposit is late, an extension request made by the broker-dealer A) is not required but can be made, and may or may not be granted. B) is required to be made but may not always be granted. C) is not required but, if made, will always be granted. D) is not permitted to be made in any circumstance.
A (may or may not) Explanation Extension requests can be made by the broker-dealer but are not mandatorily required. When made to the firm's designated examining authority (DEA), they may or may not be granted.
Isaac James has some call options in his account that he would like to exercise. He wants to know when the resulting purchase of the stock would settle. You would tell him A) trade date plus 2 business days. B) trade date plus 3 business days. C) trade date plus 1 business day. D) trade date.
A (option was EXERCISED not purchased/sold) Regular trading is in play Explanation When purchasing or selling an option, the settlement is the next business day. When an option is exercised the resulting stock transaction is 2 business days following exercise.
Which of the following best describes how a buy stop @ 39 would fill? A) The next available price after the market price rises to 39 B) The next available price after the market price falls to 39 C) The next price above 39 after the market price rises to 39 D) The next price below 39 after the market price falls to 39
A (rises) Explanation A buy stop order becomes a market order and fills at the next available price once it touches or passes through the stop price.
For collateral trust bonds, all of the following are true except A) these are unsecured debt securities. B) the issuer deposits securities it owns into a trust. C) a trust serves as a depository holding the securities to serve as collateral. D) securities backing the debt can be securities of either fully or partially owned subsidiaries.
A (trusts, collateral, vault, secured) Explanation For a collateral trust certificate, the issuer deposits securities of other corporations that it owns, or securities of fully or partially owned subsidiaries into a trust. The securities held in the trust are the collateral backing the certificates, and thus with this backing, the certificates are considered secured debt instruments.
Which of the following would be true with regard to capital gains? If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer's ordinary income. If the asset is held for more than a year, the gain is considered to be long term and is taxed at a favorable rate. Capital gains are usually associated with the distribution of dividends including stock splits. Capital gains can be defined as the income earned from interest, wages, rents, royalties, and similar income streams. A) II and III B) I and II C) I and III D) III and IV
B short-term capital gains, the tax rates are the same as the taxpayer's ordinary income. if the asset is held for more than one year, the gain is considered to be a long-term and is taxed at a favorable rate.
Regarding the Regulation T requirement, which of the following is true? A) It is currently 30% and must remain unchanged unless mandated by Congress. B) It is currently 50% but can be changed at any time by the Federal Reserve Board (FRB). C) It is currently 25% but can be changed at any time by the FRB. D) It is currently 50% and must remain unchanged unless mandated by Congress.
B It's a margin, Fed can change it Explanation The Regulation T initial margin requirement is currently 50%. While it has been so for many decades, it can be changed by the Federal Reserve Board anytime it deems appropriate to do so.
The Investment Company Act of 1940 classified all the following as investment companies except A) face-amount certificates. B) private investment companies. C) management companies. D) unit investment trusts.
B (1940 USA WAR PRIVATE) Explanation The three classifications established under the Investment Company Act of 1940 are face-amount certificates, unit investment trusts, and management companies (open and closed-end funds). Private investment companies do not come under the Act of 1940.
A bond with a 4.5% stated yield might make annual interest payments of $45. annual interest payments of $450. semiannual interest payments of $2.50. semiannual interest payments of $22.50. A) II and IV B) I and IV C) I and III D) II and III
B (4.5 X 1000) Explanation 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.
Accrued interest on U.S. government bonds is calculated using A) 30 days in each month and 365 days in each year. B) actual days in each month and actual days in the year. C) 30 days in each month and 360 days in each year. D) actual days in each month and 360 days in each year.
B (Accured uses actual) Corporate and municipal bonds use the artificial 30-day, 360-day calendar, government bonds use actual days.
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? A) Debentures B) Adjustment bonds C) Mortgage bonds D) Subordinated debt
B (Adjust to income) 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.
An issuer of bonds can be A) corporate entities only. B) corporate and both the federal and municipal governments. C) corporates and municipal governments only. D) federal and municipal governments only.
B (Anyone who can issue debt) Explanation Debt instruments (bonds) can be issued by corporations, and both federal and municipal government entities.
An individual owning shares of a corporation's common stock would have all of the following rights except A) to vote when unable to be present at a shareholder meeting. B) to declare dividends. C) to review a list of stockholders. D) to vote for those who will serve on the board of directors (BOD).
B (BOD DECLARES) Explanation Common shareholders have a number of rights. While they may receive dividends, declaring dividends is a function of the BOD.
Which of the following accounts can only be opened in a cash account? Individual transfer on death (TOD) account Individual account Individual retirement account (IRA) Individual custodial account A) I and IV B) III and IV C) I and II D) II and III
B (IRA and Custodial accounts) Explanation IRAs and custodial accounts prohibit the use of margin, so they must be done in cash accounts. These other accounts can be cash or margin.
Which of the following securities can never be purchased on margin? A) Any stocks that trade on Nasdaq B) Any mutual funds C) Any warrants D) Any over-the-counter (OTC) stocks
B (NO margin for MUTUAL)
Negotiable jumbo CDs are characterized by all of the following except A) they are issued in amounts of $100,000-$1 million. B) each issue generally matures in 5-10 years. C) they trade in the secondary market. D) they are unsecured debt of the issuing bank.
B (Negotiable Jumbo CD's are money markets instruments; mature 1 year or less) Explanation Negotiable jumbo CDs are issued in denominations of $100,000-$1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. These CDs are unsecured promissory notes backed only by the credit standing of the issuing institution.
On a long put, when the premium equals the intrinsic value, the put is A) at its breakeven point. B) at parity. C) out of the money. D) past expiration.
B (PUTS at parity when the premium equals the intrinsic value.) Explanation All puts are in the money when the market price is below the strike price. They are out of the money when the market price is above the strike price. They are at the money when the market price equals the strike price. They are at parity when the premium equals the intrinsic value.
Which of the following types of investments is least likely to be a major investment strategy for hedge funds? A) Options B) Money market instruments C) Selling short D) Currencies
B (because of short maturities, money market are too safe for HEDGE) THINK HIGH RISK
If a customer's Regulation T margin deposit is late, which of the following is true? A) The customer can apply to the bank where the margin loan originated for an extension. B) The broker-dealer may apply to its designated examining authority (DEA) for an extension. C) The customer may apply to the broker-dealer's designated examining authority (DEA) for an extension. D) The broker-dealer can apply to the bank where the margin loan originated for an extension.
B (broker with the DEA) Explanation In the event of late margin deposit, requests for extensions are made by the broker-dealer to the firm's designated examining authority (DEA).
Your customer has purchased an MJS October 35 call at 4. Their proof of ownership will be A) the executing broker-dealer's account records. B) the trade confirmation. C) the certificate issued by the underlying company (MJS). D) the Options Clearing Corporation (OCC) issued certificate.
B (confirm the trade) Explanation Options are issued by the 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.
If investors have income listed as their investment objective, they would not hold which of the following securities in their portfolio? A) Corporate bonds B) Income bonds C) Preferred stock D) U.S. T-notes
B (no income, no interest) HIGH RISK Explanation Also known as adjustment bonds, income bonds pay interest only if the issuer has enough earnings to do so. They are often issued by companies coming out of bankruptcy. As a result, the interest payments providing the income to meet the objective are uncertain.
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? A) $6,225 B) $1,350 C) $225 D) $810
B (number of contracts times premium) 225 X 6= 1350 Explanation 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 (six) multiplied by the amount of the premium received, $225. Therefore, this investor's maximum loss is $1,350.
A customer's account has been frozen. Which of the following is true if the customer wants to purchase more securities? A) Funds can be borrowed in the form of a margin loan up to 50% of the securities' value. B) Funds to pay in full must be available in the account before the buy order is entered. C) Approval must be received for any purchase in the account from the Securities and Exchange Commission (SEC).v D) No new purchases can be made in an account that has been frozen.
B (pay in full, available in the account) Explanation Purchasing securities in a frozen account is permitted, but the funds to pay for the purchase in full must be available in the account before the order can be entered.
Your client is buying municipal bonds and wants to know when payment is due. You should tell him A) trade date plus 3 business days. B) trade date plus 2 business days. C) trade date plus 1 business day. D) trade date. (list the three types that trade date is plus 1 business day)
B (regular way) Explanation Regular way settlement is T + 2 for everything except treasuries, money market securities, options
With money market securities held in one's portfolio, relative to other, longer-term debt securities, an investor should expect A) a higher degree of safety with higher returns. B) a higher degree of safety with lower returns. C) a lower degree of safety with lower returns. D) a lower degree of safety with higher returns.
B (short maturities mean HIGH safety, Lower return) Explanation 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.
Buy limit orders are placed _______ the current market price and fill at the stated price or _______. A buy stop order becomes a ______ and fills at the next available price once it touches or passes through the _______. Sell stop orders are placed _____ the current market price Stop orders become _____ once triggered, and stop limit orders become ________ at the specified limit once triggered. Sell limit orders are placed _____ the current market price and fill at the stated price or ______.
Buy limit orders are placed below the current market price and fill at the stated price or lower. A buy stop order becomes a market order and fills at the next available price once it touches or passes through the stop price. Stop orders become market orders once triggered, and stop limit orders become orders to sell at the specified limit once triggered. Sell limit orders are placed above the current market price and fill at the stated price or higher.
6% XYZ debentures are trading for $1,200 while similarly rated bonds are being offered at 4.5%. What is the current yield on the 6% XYZ debentures? A) 6% B) 1.5% C) 5% D) 7.5%
C CY equals annual income divided by current market price Explanation Current yield is defined as the annual income (or coupon rate) from a bond divided by the bond's current market price ($60 ÷ $1,200 = 0.05 or 5%). Accordingly, the current yield (5%) is lower than the coupon rate (6%) because the bond is trading at a premium.
Your client Soren buys a 4% XYZ Corporate bond. If his current yield is 5% he bought the bond at A) par. B) above par. C) a discount. D) a premium. For ______ bonds, the nominal yield is lower than both the ______ and the ______.
C Coupon is BELOW CY For discount bonds, the nominal yield is lower than both the current yield and the YTM.
Your client James Thomas is an active trader and wants to invest in a managed equity portfolio that he can trade intraday. Which of the following should you recommend? A) An exchange-traded fund (ETF) B) An exchange-traded note (ETN) C) A closed-end fund D) A mutual fund
C Explanation A closed-end fund is actively traded and most of them are equity funds and they trade on the exchanges like stocks. Mutual Funds can be equity funds and can be actively managed, but because they only trade once per day, they are not good for active trading. ETFs are actively traded but are not actively managed, ETNs are debt securities not equities.
Which of following securities is least likely to have an active trading market? A) Real estate investment trusts (REITs) B) Municipal bonds C) Limited partnership interests D) Preferred shares
C Explanation 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.
A customer receives a voting proxy from a broker-dealer for shares owned by the customer and held in street name. The customer returns the proxy but later decides to attend and vote at the shareholder meeting in person. The voting proxy A) would be deemed the shareholders vote because it would have already been counted. B) once signed could not be replaced by a vote made in person or by another proxy executed later. C) would be revoked, and only the vote at the meeting would count. D) would need to be rescinded in writing by the broker-dealer in order for the shareholder to vote in person.
C Explanation A proxy is automatically revoked if the stockholder attends the shareholder meeting and votes. Additionally, a proxy is revoked if another is executed later.
An investor is short a January 30 call at 5. Breakeven is A) 500. B) 25. C) 35. D) 30.
C Explanation 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.
All of the following are true of Roth IRAs except A) contributions are made after tax. B) contributions may be able to be made after 72. C) contributions may be deductible depending on income limits. D) withdrawals are not required at age 72.
C Explanation Contributions are not deductible, they are made with after tax dollars and may continue past 72 if still working. Roth IRAs are not subject to required minimum distributions (RMDs).
Which of the following orders need not be immediately filled in their entirety? Immediate or cancel (IOC) Fill or kill (FOK) Market at open Buy stop limit A) I and III B) II and III C) I and IV D) II and IV
C Explanation Immediate or cancel (IOC) orders allow partial execution, with the unexecuted portion of the order being canceled. Limit orders may be partially filled. A limit order may be filled in pieces until the end of the day (if a day order), or until cancelled (if GTC). Both FOK and market at open orders are expected to be filled immediately and in their entirety. If unable, a FOK order would be canceled (killed).
Which of the following securities can never be purchased on margin? A) OTC stocks B) Warrants C) Mutual funds D) Stocks that trade on NASDAQ
C Explanation Mutual funds can never be purchased on margin. Exchange-traded and NASDAQ stocks and OTC stocks that are on the Federal Reserve Board approved list can be purchased on margin.
A customer receives a Regulation T margin call for $3,200. To meet the deposit requirement, which of the following can be deposited? A) Cash in the amount of $1,600 B) Fully paid for marginable securities totaling $3,200 in market value C) Fully paid for marginable securities totaling $6,400 in market value D) Fully paid for marginable securities totaling $1,600 in market value
C Explanation When meeting a Regulation T margin call with cash, 100% of the call must be deposited—in this case, $3,200. If using fully paid for marginable securities to meet the call, a deposit totaling twice the amount of the call must be made—in this case, $6,400. This is because securities are only marginable to 50% of their value.
As long as it is not restricted in any documentation, margin trading is permissible in which of the following accounts? Corporate IRA Partnership Fiduciary A) I and IV B) II and IV C) I and III D) II and III
C (fiduciary and IRA are the same example) Explanation Corporate accounts may utilize margin as long as it is not restricted in the corporation's charter or bylaws. Partnership accounts may utilize margin as long as it is not restricted in the partnership resolution. Fiduciary accounts such as IRAs (and other retirement accounts) and custodial accounts would generally not be permitted to trade on margin unless permission to trade on margin is specifically stated.
A hedge fund having a lock-up provision means that A) a minimum return is guaranteed or investments are fully refundable—locked up. B) provisions have been made to lock up new buyers so sales of shares can be made easily. C) investors are required to maintain the investment for a minimum length of time. D) the fund organizers are fully accountable and can be sued in the courts with full ramifications.
C (illiquid, hold shares for a minimum length) Explanation A lock-up provision means that the fund requires investors to hold their shares for a minimum length of time that the fund establishes. Therefore funds having a lock-up provision are associated with being illiquid.
When customers open margin accounts, when must they be provided with a risk disclosure document? Before initially opening the account Quarterly Semiannually Annually A) I and II B) III and IV C) I and IV D) I only
C (initial and annually MARGINAL) Explanation The risk disclosure document is required before opening the account and annually after opening the account.
All of the following is true about local government investment pools (LGIPs) except A) LGIPs operate similarly to a money market instrument. B) pools are not required to register with the Securities and Exchange Commission (SEC). C) investors must be provided a prospectus at or before they purchase shares in the investment portfolio. D) the pool maintains a fixed $1 net asset value.
C (no SEC so No prospectus) Explanation The operating characteristics of LGIPs are similar to those of money market funds, and they keep a $1 net asset value (NAV). They are not required to register with the SEC and therefore there is no prospectus but do provide information statements, which include details of the management fees.
Regarding bankruptcy proceedings, A) a plan for reorganization must be submitted first before the courts can offer protection from creditors. B) the procedure is only available to individuals seeking protection from creditors and not business entities. C) liquidation of assets must occur first before the courts can offer protection from creditors. D) courts protect both corporate and individual filers from creditors.
D (Courts protect) Explanation Bankruptcy is a general term for court procedures available to both individuals and businesses. During the proceedings, filers are protected by the court from creditors. Protection is granted independent of any actions to liquidate or file a plan for reorganization.
Advantages enjoyed by the limited partners in a partnership might be all of the following except A) owning an interest in an investment managed by others. B) having income and expenses flow directly through to them. C) having liability limited to the loss of the money invested. D) being in a fiduciary position with responsibilities to others.
D (GP are the fiduciary; manages the money) Explanation 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.
A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for A) $1,500. B) $3,000. C) $1,000. D) $2,000.
D (because it's initial 2,000 minimum) Usually would be 1,500 Explanation No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met.
For the risk disclosures found in the options disclosure document (ODD), all of the following would be accurate disclosures except A) customers can lose more money than initially deposited. B) customers are not entitled to an extension of time to meet a margin call. C) firms can increase their in-house margin requirements without advance notice. D) if a maintenance call is not met, the customer must direct which securities to sell.
D (broker dealer chooses which, not customer) Explanation If a maintenance call is not met it is the broker-dealer who determines which securities to sell, not the customer. The others are all accurate disclosures found in the ODD.
A broker-dealer firm has just rehypothecated a thousand shares of MMS stock. This means A) the firm has withdrawn the stock from a bank and pledged it to the customer. B) a bank has pledged the stock to the firm, which now pledges it to the customer. C) the customer withdraws the stock from the bank and pledges it directly to the firm. D) the customer pledged the stock to the firm, which has now pledged it to a bank.
D (customer to firm to bank) Explanation In a long margin account, customers put up at least half the purchase price of securities, and the broker-dealer firm borrows the remainder on the customer's behalf from a bank. The customer pledges the securities to the broker-dealer, which is known as hypothecating the securities. The broker-dealer then rehypothecates them to the bank as collateral for the margin loan.
All of the following are true of negotiable commercial paper except A) it is considered a money market instrument B) it has a maximum 270-day maturity C) the issuers typically have strong credit ratings D) it is typically issued by banks
D (issued by corporations) Explanation Commercial paper is short-term unsecured debt issued by corporations having very good credit ratings. With a maximum 270-day maturity, it is considered a money market instrument.
Which of the following regarding open-end (mutual fund) and a closed-end management investment company is true? A) A closed-end company sets its own dividend ex-date, but an open-end company's ex-date is set by its self-regulatory organization (SRO). B) Only the closed-end company may issue additional shares without changing its charter. C) The price of open-end company shares is set by supply and demand, but not the price of closed-end shares. D) An open-end company may sell fractional shares, but a closed-end company may not.
D (open to fractions) Explanation 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.
An investor pays 102 ($1,020) for a $1,000 par value bond. At maturity, A) the premium paid increases the return. B) the discount received decreases the return. C) the discount received increases the return. D) the premium paid decreases the return.
D (premiums at Par = decrease return) 1020 - 1000 par Explanation A $1,000 par value bond purchased at 102 ($1,020) is bought at a premium to par. Whenever a bond is purchased for an amount greater than will be received at maturity, the premium paid decreases the return. In this case, the additional $20 paid when the bond was initially purchased reduces the overall return from the interest payments received.
When an investor purchases a corporate bond, the investor is A) borrowing money from and becoming an owner of the corporation. B) lending money to and becoming an owner of the corporation. C) borrowing money from and becoming a creditor of the corporation. D) lending money to and becoming a creditor of the corporation.
D (stocks own, bond loans) buying is to lend Explanation While stock represents ownership, a bond represents a loan. When investors purchase bonds, they are lending money to the borrowing entity and thus become creditors of the entity.
In order to meet federal budget needs, the types and quantity of government securities to be issued are determined by A) the chairman of the Federal Reserve Board. B) the Federal Reserve Board (FRB). C) the U. S. president and Congress. D) the U.S. Treasury Department.
D (treasury uses the Fed) Explanation It is the U.S. Treasury Department that determines the types and quantities of government securities to be issued each week in order to accommodate budgetary needs. At the time of issue, the Federal Reserve Board acts as the Treasury Departments agent.
All of the following statements about securities purchases are true except A) in a short margin account, customers borrow securities for short sales. B) in a cash account, the customer pays in full for securities. C) in a long margin account, customers borrow money for securities purchases. D) securities may not be purchased with borrowed money.
D (you can borrow for purchases) Explanation Borrowing is a perfectly acceptable practice when buying and selling securities, whether it is cash that is borrowed for purchases or securities that are borrowed, chiefly from other investors who have signed a loan consent agreement, allowing their securities to be borrowed for short sales.
The maximum loss on any long option position is __________. If the price of the underlying security moves against the option, the owner simply does not exercise the option, allowing it to expire worthless.
premium
Which of the following strategies is a covered call? A) Short call, long call B) Short stock, long put C) Short stock, short call D) Short put, short call
A Explanation A short call is considered covered when the seller of the call either owns the underlying security, or has a way to get the security at a preset price (like owning a call).
Once a customer account has been opened at a broker-dealer, rules require that updating information on the account record occur no less frequently than once every A) 36 months. B) other year. C) year. D) quarter.
A Explanation Account updating must occur at least every 36 months thereafter.
Regarding the potential financial exploitation of seniors, impacted accounts would be those for individuals A) age 65 and older, or age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect her own interests. B) who at any age are unable to protect her own interests. C) age 55 and older, or age 21 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect her own interests. D) who are past the age of 75 and the member reasonably believes has a mental or physical impairment that renders the individual unable to protect her own interests.
A Explanation Financial Industry Regulatory Authority (FINRA) has specifically identified for the purpose of preventing financial exploitation of seniors individuals who are age 65 and older, or age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect her own interests.
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? A) Short puts B) Long puts C) Short calls D) Long calls
A Explanation 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 with no existing positions in MMS stock sells 100 shares. This is A) a short bearish position. B) a long bearish position. C) a short bullish position. D) a long bullish position.
A Explanation With no other existing positions, this sale transaction would have to be opening a position. Sell to open a position = short = bearish.
WRJ stock is quoted as 21 bid, 21.15 offer. Which of the following is true? A purchase can be made at $21 per share if buying at the market. A purchase can be made at $21.15 per share if buying at the market. The spread is $0.15. A sale can be made at $21.15 per share if selling at the market. A) II and III B) III and IV C) I and IV D) I and III
A Investors pay ask to purchase Explanation A quote always represents the bid and an ask (offer) price. Investors pay the current ask price when purchasing (21.15) and receive the current bid price when selling (21). The spread is the difference between the bid and the ask price—in this quote, 0.15.
Margin calls can be met with deposits of A) cash or fully paid for marginable securities. B) either marginable or non-marginable securities. C) fully paid for marginable securities only. D) cash only.
A Margin calls can be met using either cash (100% of the call) or fully paid for marginable securities (twice the amount of the call because securities are only marginable to 50% of their value).
If the dollar price of a municipal bond is 101 and the basis is 6.10, the nominal yield is A) greater than 6.10. B) less than 6.10. C) equal to the yield to maturity (YTM). D) 6.10.
A Premium to par (101 > 100) (Coupon/nominal is higher) than Basis (Yield to Maturity Explanation For bonds trading at a premium (101), the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are yield to call (YTC), YTM, current yield, and nominal yield.
Under Regulation T, when must a corporate stock transaction be paid for in full in a cash account? A) No later than regular ways settlement plus two business days B) No later than trade date plus two business days C) No later than the next business day D) No later than the day of the trade if the trade is placed before 2:00 pm ET
A regular Cash trade is next day Explanation Regulation T states that the trade in a cash account be paid for in full no later than settlement date plus two business days. Regular way settlement is trade date plus two business days. Next business day is how government bonds settle and a cash trade (different from a trade in a cash account) settles same day.
All of the following are true of Roth IRAs except A) Contributions may be able to be made after 72 B) Contributions may be deductible depending on income limits C) Withdrawals are not required at age 72 D) Contributions are made after tax
B Explanation Contributions are not deductible. They are made with after-tax dollars and may continue past age 72 if still working. Roths are not subject to RMDs.
For Treasury bills, which of the following are true? T-bills are issued at a discount to par. T-bills have maturities of 1-10 years Most T-bill issues are callable and convertible. T-bills are a direct obligation of the U.S. government. A) II and III B) I and IV C) I and III D) II and IV
B Explanation T-bills are issued at a discount to par, are six 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.
Which of the following retirement plans does not require minimum distributions once the participant has reached age 72? A) 401(k) B) Roth IRA C) 403(b) D) Traditional IRA
B Explanation The Roth IRA has no specific requirement that the participant receive distributions. In all of the other plans, generally, upon reaching age 72, minimum distributions must commence no later than the following April 1.
Distinguishing between a sell stop order and a sell stop limit order, which of the following are true? The sell stop limit order becomes a sell limit once triggered. The sell stop order becomes a sell limit order once triggered. The sell stop limit order becomes an order to sell at the market triggered. The sell stop order becomes an order to sell at the market triggered. A) I and III B) I and IV C) II and IV D) II and III
B SSL becomes SLO SSO becomes OTS Explanation Stop orders become market orders once triggered, and stop limit orders become orders to sell at the specified limit once triggered. Stop or stop limit orders can be either buys or sells.
The maximum potential loss for an investor short a put option is A) strike price plus premium. B) strike price minus premium. C) unlimited. D) premium received.
B Short puts are bullish. In wanting the stock price to rise, one's risk is that the stock falls in price below the breakeven point. The maximum loss occurs if the stock falls to zero. Therefore, the maximum loss on a short put is equal to the breakeven (strike price minus premium for puts).
he two classifications of chapters for corporate bankruptcies are liquidations. reorganizations. bankruptcy. failures. A) I and IV B) II and III C) I and II D) III and IV
C liquidations: where assets are sold off and proceeds are distributed based on the priority of the claim reorganizations: where the company continues to operate under a plan to repay creditors.
The coupon for a bond is calculated as a percentage of A) par value, usually $10 for a bond. B) par value, usually $100 for a bond. C) par value, usually $1,000 for a bond. D) current market value for a bond.
C ($1000) Explanation The coupon rate on a bond is calculated as a percentage of par value. While par value can be any amount the issuer determines it to be, it is usually $1,000 for bonds and should be assumed to be so, unless it is indicated otherwise.
The XYZ May 45 puts are trading 2.50. The current market value (CMV) for XYZ stock is $42.50. The May 45 put is A) at the money. B) without any intrinsic value. C) at parity. D) out of the money.
C (45 - 42.50 = 2.50) The amount that an option is in the money is its intrinsic value (IV). In this case, 2.50 points (45 − 42.50 = 2.50). An option is at parity when the premium equals intrinsic value. The premium of 2.50 equals the contract's 2.50 IV; therefore, the option is at parity.
Which type of account fee structure is typically better for the moderate to active trader? A) A narrow-based account B) A broad-based account C) A fee-based account D) A commission-based account
C (Baird, fee-based) Explanation With a fee-based account, the customer is charged a fixed fee regardless of the number of trades. With a commission-based account, the customer is charged a fee for each trade. Broad- and narrow-based are not types of accounts, but rather a reference to types of index funds.
Which of the following accounts can only be opened in a cash account? Individual transfer on death (TOD) account Individual account Individual retirement account (IRA) Individual custodial account A) II and III B) I and IV C) III and IV D) I and II
C (CASH NOT MARGIN) (cash for custodian) Explanation IRAs and custodial accounts prohibit the use of margin, so they must be done in cash accounts. These other accounts can be cash or margin.
Accrued interest on corporate bonds is calculated using A) actual days in each month and actual days in the year. B) actual days in each month and 360 days in each year. C) 30 days in each month and 360 days in each year. D) 30 days in each month and 365 days in each year.
C (Corporate and municipal bonds) NOT GOV Explanation Corporate and municipal bonds use the artificial 30-day, 360-day calendar, but government bonds use actual days.
In safety of principal, municipal bonds are considered second only to A) AAA-rated corporate debt issues. B) corporate common stock issues. C) U.S. government and agency bonds. D) corporate preferred stock issues.
C (US gov and agency issues are safest) Explanation Municipal securities are considered second in safety of principal only to U.S. government and agency issues.
All of the following pay interest except A) GNMAs. B) T-notes. C) T-bills. D) T-bonds.
C (bills are discount, pay at maturity sub 1year) Explanation T-bills are sold at a discount and pay par at maturity. The difference between the discounted price and par is considered interest, but T-bills don't make interest payments.
For revenue bonds issued by a state or municipality, which of the following is true? A) Interest and principal payment is backed by the full faith and credit of the issuer. B) The bonds carry an unqualified promise to pay interest and principal backed by the power of the issuer to levy taxes. C) 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. D) Interest and principal payment is guaranteed.
C (no revenue, no interest/principal payments) Explanation 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 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 A) Treasury STRIPS. B) Treasury bills. C) Treasury receipts. D) collateralized obligations.
C (notes and bonds in a trust mean Receipt) Explanation 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.
Hypothecation is A) opening a position in a margin account. B) the closing of a securities initially position purchased on margin. C) the pledging of customer securities as collateral for margin loans. D) replacing shares that were borrowed to sell short in a margin account.
C (pledging collateral for a margin loan) Explanation Hypothecation is agreed to in the margin account agreement. The customer agrees to pledge the securities to be purchased on margin to the broker-dealer so that the broker-dealer can then pledge them to a bank as collateral for the margin loan.
A corporation wanting to raise cash to finance accounts receivable and seasonal inventory needs is likely to issue any of the following except A) prime paper. B) promissory notes. C) bonds. D) commercial paper.
C (seasonal meaning short, Bonds are longterm) Explanation To raise cash for short-term needs, such as accommodating accounts receivable or inventory needs, corporations would issue commercial paper (also known as prime paper or promissory notes). Bonds should always be associated with long-term debt financing.
A customer of a securities firm has concluded that selling short would be an effective trading technique to reach his investment goals. Assuming the firm's principal agrees to permit the customer to effect short sales, what type of account would be most suitable for short selling? A) Fiduciary account B) Individual retirement account C) Margin account D) Cash account
C (sell short of the margin) Explanation Investors who choose to sell short eligible securities must satisfy Federal Reserve Board (FRB) margin requirements to do so. The margin requirement is a deposit of 50% of the sale proceeds in the customer's margin account.
When securities are bought and sold, ownership changes hands between the buyer and the seller A) upon delivery of the trade confirmation. B) at an agreed time between both parties. C) on the settlement date of the transaction. D) on the transaction date.
C (settle each other's hands) Explanation When securities transactions occur, ownership changes hands between the two parties on the settlement date.
A customer wants to save some money for his grandson's college education in an IRA account. Which of the following regarding a Coverdell Education Savings Account (ESA) is true? A) The customer may make annual contributions until the grandson graduates from college. B) The customer may take a deduction for the amount contributed. C) The funds must be distributed by the time the grandchild attains age 30, unless they are rolled over. D) The maximum contribution permitted is $3,000 annually.
C (too old for college) Explanation The maximum annual contribution to an ESA is $2,000. Contributions are not deductible and must cease when the beneficiary reaches age 18. Any unused balance must be rolled over or distributed by the time the beneficiary attains age 30. Amounts not used for one child may be rolled over tax free to the account of another child of the same family only once during any 12-month period.
An investor has purchased bonds having a put feature attached. With this put feature, it is likely that these bonds were issued with A) a coupon that need not reflect the impact of the call feature. B) a higher coupon than similar bonds without the feature. C) a coupon that will be called away by the issuer before maturity. D) a lower coupon than similar bonds without the feature.
D Call (higher coupon to make up for risk to investor) Put (Lower coupon, less risk of being taken by issuer)
Which of the following statements is the most correct regarding customer accounts? A) Cash accounts need to be approved by a principal promptly after the first trade. B) Hypothecation agreements are required for joint cash accounts only. C) Only margin accounts need to be approved by an authorized principal of a broker-dealer. D) A customer may open both a cash and margin account at the same time.
D Explanation Customers may open a cash account, margin account, or any other account so long as the firm supports that type of an account and an authorized principal approves it.
A client calls a registered representative and states that they live in New York City and that they are looking for a bond that would be triple tax free in New York. The registered representative tells the client that his firm has some bonds in inventory that are from the Albany, NY, school district that would be triple tax free for the client. Which of the following would be the registered representative's best course of action? A) Determine suitability prior to the trade and mark the trade unsolicited. B) No suitability determination is required because these bonds will be tax free for the client and mark the trade unsolicited. C) No suitability determination is required becasue the bonds will be tax free for the client and mark the trade solicited. D) Determine suitability prior to placing the trade and mark the trade solicited.
D Explanation For a trade to be unsolicited the client would need to specifically identify the bonds they wanted to purchase instead the registered representative is the one who recommended these bonds making the trade solicited. Suitability must be determined on solicited trades.
Broker/dealers who reserve the right to disclose nonpublic private information about their customers to unaffiliated third parties must A) require that customers wishing to opt out send a written request with signature witnessed by a notary. B) provide reasonable means for customers to opt out of such disclosures only at the time of the account is opened. C) provide notice to customers each time a transaction occurs within the account and provide reasonable means for customers to opt out of such disclosures. D) provide notice to customers at the time of the account opening and provide reasonable means for customers to opt out of such disclosures.
D Explanation Regulation S-P requires that if a broker/dealer reserves the right to disclose nonpublic personal information to third nonaffiliated parties, it must notify the customer at the time of the account opening and annually thereafter. Means to opt out of the disclosures must be reasonable and easy. Requiring a written request to opt out would not be considered reasonable means under the regulation.
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? 6% is the bond's coupon. 6% is the bond's current yield. 6.5% is the bond's yield to maturity. 6.5% is the bond's current yield. A) II and IV B) II and III C) I and IV D) I and III
D Explanation 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. (mature people get to base)
A customer buys a 4% Treasury bond, maturing in 10 years, at a price of $96.08. The yield to maturity (YTM) is A) less than nominal yield. B) same as current yield. C) less than current yield. D) greater than nominal yield.
D if priced below Par (1000), it's at a discount Higher YTM than Current Yield since it will mature to Par (1000) 96.08 < 1000 Explanation A bond whose price is below par (priced at a discount) has a higher YTM than current yield, which in turn is higher than the nominal yield.
Interest on a 7% corporate bond would be paid to the investor as A) several checks totaling $70 each year. B) one annual $70 check. C) two semiannual checks for $70 each. D) two semiannual checks for $35 each
D (Corporate bonds are semiannual) Explanation Interest on corporate bonds is paid twice per year, or semiannually. The interest rate reported, however, is an annual rate. Thus a 7% bond would pay 7% of par ($1,000), or $70, per year as two semiannual checks for $35 each.
For bonds at a premium, yields from lowest to highest are: YTM, yield to call (YTC), nominal yield, current yield,
For bonds at a premium, yields from lowest to highest are yield to call (YTC), YTM, current yield, and coupon yield.
If a bond is trading at a discount, which of the following rates is correctly ranked from low to high? current yield, yield to maturity, coupon rate, yield to call,
The order from low to high is coupon rate, current yield, yield to maturity, yield to call. CCMC (DISCOUNT)
