Unit 1

Your customer is interested in a soon-to-be-issued revenue bond sold by the Piute County municipal water district. Which of the following would you send to the customer?

Official statement

The city of Marysville, Utah, is issuing a bond to raise capital to buy new equipment for the fire department. Which of the following documents would a representative give to a customer to give them more information?

Official statement - The standard disclosure document in a municipal offering is called an official statement.

According to the Conduct Rules, a FINRA member firm may give certain selling concessions to which of the following?

Other member firms

What happens to outstanding fixed-income securities when interest rates decline?

Prices increase

General communications by a broker-dealer firm, such as customer orders and complaints, must be reviewed by which of the following?

Principal of a member

A broker-dealer participating in a sale of a new offering may do which of the following?

Provide a red herring

Which of the following would be obligated to purchase stock should the option be exercised?

Put writer

Which of the following would be obligated to purchase stock should the option be exercised?

Put writer - Remember that buyers have rights and sellers have obligations. Writing is selling; therefore, the answer is either put or call writer. If the buyer of a put has the right to sell the stock (put down), then if the contract is exercised, the seller (writer) of the put is obligated to buy the stock.

Which of the following is not an accredited investor under Regulation D?

Registered securities analyst

An exchange is part of what market?

Secondary market

Regarding U.S. Government securities, the term intermediate maturity best describes

T-notes.

A mutual fund shareholder purchases no-load shares at the beginning of an investment period and, at the end of the investment period, sells the shares for a gain. Which of the following statements is true?

The NAV per share was lower at the beginning.

Which of the following statements regarding a corporate bond quoted as QRS Zr 20 is true?

The bond pays no interest until maturity.

A customer buys a long-term, 10% Treasury bond with a current yield of 12% and holds the bond until one year before maturity. She sells the bond when the short-term T-bill rate is 8%. Which of the following statements are correct?

The bond was purchased at a discount. The bond was sold at a premium.

What would happen to the market value of existing bonds during an inflationary period coupled with rising interest rates?

The price of the bonds would decrease.

Which of the following statements is true of the Securities Act of 1933?

The purpose of the requirements for registration and a prospectus is to provide full disclosure of pertinent information to the public.

Your client invests in an open-end investment company whose portfolio consists of insured municipal bonds issued within his state. Which of the following statements is correct regarding the taxation of distributions from this fund?

There is no federal income tax due on any dividend distributions, but the capital gains distribution would be subject to tax.

What is the maximum number of accredited investors allowed in a Regulation D private placement?

There is no limit

A broker-dealer who functions as an over-the-counter (OTC) market maker in a listed security is operating in which market?

Third market

Which of the following securities is not required to register with the SEC based on who issued the security?

Treasury Bonds

Which of the following income investments would be most suitable if interest rates were expected to increase sharply within the next two years? A)

Treasury bills

An income-seeking investor is concerned with the possibility of rising interest rates over the next few years. Of the choices listed, his best investment selection would be

Treasury bills.

Which type of marketable security pays semiannual interest?

Treasury bond

The interest from which of the following bonds is subject to federal income tax?

Treasury notes FNMA

An investor desiring safety of principal, modest returns, and having a 5-year investment horizon should choose which of the following?

Treasury notes - Treasury notes best suit the investor's objective of safety and expectation of modest returns. They have 2-to-10 year maturities suitable to the investor's investment time horizon as well.

An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA-rated bonds should her registered representative recommend?

XYZ zero-coupon bond maturing in 5 years - Because they make no interim payments, zero-coupon bonds have duration equal to maturity. Of the choices offered, only XYZ is both long term (over one year to maturity) and zero coupon.

ALFA Securities acts as a dealer when filling a customer's order to purchase 300 shares of LMN. ALFA makes its profit from

a markup on the offering price of the securities.

A new registered representative receives a memo discussing the distribution of a red herring. The registered representative knows that the memo is referencing

a preliminary prospectus.

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 except

commercial bank holding company securities.

An investor has purchased convertible bonds issued by ABC. The common stock of ABC has risen dramatically in recent months. The price of the bonds will most likely reflect the current market value of the company's

common stock

A FINRA member quotes 32.25 - 32.50 on an over-the-counter stock. A customer who wishes to sell at that price informs the broker-dealer of this, and the trade is completed. The customer delivers the stock the next day, but now the price is 28.75. According to the rules, the trade will be

completed at 32.25 - The customer sells at the bid price, which is 32.25. The trade terms are fixed as of the trade date, regardless of price movements before settlement.

If the RST Corporation has issued several different debt securities, an investor would expect the lowest income stream from RST's

convertible debentures.

If a bond is nearing the end of its call protection, this will tend to

make the bond less attractive to investors because a call would terminate the interest payments.

A preliminary prospectus (red herring)

may be used to gather indications of interest.

Ginnie Mae pass-throughs will pay back both principal and interest

monthly.

Transactions in all of the following are effected in the money market, as opposed to the capital market, except

municipal revenue bonds.

When a client's cash account is frozen, the client

must deposit the full purchase price before a purchase order may be executed.

The market in which unlisted securities trade between market makers is called the

over-the-counter (OTC) market.

The provisions of the Securities Act of 1933 include all of the following except

prospectus requirements for municipal issues - The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934.

If interest rates increase, the interest payable on outstanding corporate bonds will

remain unchanged.

All of the following must be disclosed in a mutual fund communication containing performance data except

the SEC disclaimer stating that the securities have not been approved or disapproved by the SEC. - The SEC disclaimer is not required in public communication. The no-approval clause must be included in the prospectus.

The time period between when a registration is filed with the Securities and Exchange Commission (SEC) and the effective date is called

the cooling-off period.

The regular way ex-dividend date for cash dividends paid by a corporation is

the first business day preceding the record date.

All of the following statements regarding Treasury STRIPs are true except

the interest is taxed as a capital gain. - The interest on the bond is paid at maturity, but it is taxed as interest income over the life of the bond, not as a capital gain.

Under the Uniform Practice Code, regular way transactions for common stock settle on

the second business day following the trade date.

A final prospectus must include all of the following except

the underwriting contract - A description of the underwriting contract is required, but not the contract itself. The other items listed are all requirements of the final prospectus.

The maximum amount that may be raised in a Regulation D private placement is

there is no limit.

All of the following statements regarding government and agency securities are true except

they are always directly backed by the federal government. - Only GNMAs are directly backed by the federal government.

All of the following are characteristics of an investment in Treasury notes except

they are short-term issues.

A customer bought a bond that yields 6.5% with a 5% coupon. When the bond matures, the customer will receive

$1,025 - Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.

The minimum face amount of a negotiable CD is

$100,000.

Seabird Airlines pays a $1.20 quarterly dividend. If the current yield is 4% the stock must be trading at which of these prices?

$120.00

If your customer has two bonds, and one has a coupon of 5.1% and the other has a coupon of 5.3%, what is the difference in annual interest payments between the bonds?

$2

Your customer purchased 100 shares of Bigco, Inc., stock at $150 a share. After holding the position for three years they sold the stock for $125 a share. What are the results of the trade?

$2,500 loss

Ms. Garcia sold 500 shares of Small Corporation stock short at $25 a share. The stock rose to $28 and she covered 200 shares. The stock then dropped to $22 and she closed the remainder of the short position. What is the result of the transactions?

$300 gain - Ms. Garcia received $12,500 for selling the stock short (500 × 25 = 12,500). She then purchased 200 shares for 5,600 (200 × 28) and 300 shares for 6,600 (300 × 22) for a total of $12,200 for a gain of $300.

An investor's portfolio includes an ABC 6% bond maturing in 2020 and 100 Shares of XYZ common stock. At market close, if the stock closed at $45.45 compared with yesterday's $44.95, and the bond moved from 95 to 95½, the portfolio increased in value by

$55 - The gain would be $5 for the bonds (½ point for one bond is $5) and $50 for the stock ($0.50 × 100 shares) for a total of $55. LO 1.a

Mr. Garcia purchased 100 shares of the Sierra Verde Coffee Company at $37 a share. Over the course of a year the stock paid a $0.10 a share dividend and the shares dropped to $35 a share. What is the total return for this transaction?

-4.3% - The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example, (0.4 - 2) / 37 = -1.6/37 = -4.3%.

You customer purchased 100 shares of ABC Corporation for $100 a share. The stock pays $1 in dividends annually. After the year the stock is trading at $99 a share. What is the total return for the holding period?

0% - The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example, (1 + -1) / 100 = 0%.

Harris sells 200 shares of BigCo stock short at $52 a share. Three months later he purchases 200 shares of BigCo at $45 to cover the short. What is the result of the trade?

1,400 gain

Which of the following bond prices would fluctuate the least if interest rates fall?

15-year unsecured bond with duration of 12

ABC Corporation common stock currently trades at $50.00 a share. The quarterly dividend is $0.25. What is ABC Corporation's dividend yield?

2% - The formula for dividend yield (also called current yield) is annual dividend divided by the current market value. Remember to multiply the quarterly dividend by four to get the annual dividend. In this example (0.25 × 4) / 50 = 0.02 (or 2%).

Your customer purchased 100 shares on BuyStuff, Inc., for $75 per share. The stock pays $3.25 in dividends annually. After the year the stock is trading at $74 per share. What is the total return for the holding period?

3.0% - The formula for calculating total return is income received plus gains (or minus losses) divided by cost basis. In this example, (3.25 - 1) / 75 = 3%.

ABC Corporation $6 preferred stock trades at $110 a share. What is the current yield?

5.45%

ABC Corporation $6 preferred stock trades at $110 a share. What is the current yield?

5.45% - A $6 preferred stock would pay $6 annually. To calculate current yield divide the annual dividend by the current market value. 6 / 110 = 5.45%

A bond trades at 98 and has a nominal yield of 8%. What is the bonds current yield?

8.16%

All of the following are criteria under Rule 147 (intrastate offering) except

80% of the offer must be sold to residents of the state.

Which of the following would be considered money market instruments?

A Treasury bond with 11 months to maturity A $200,000 negotiable certificate of deposit Money market securities are high-grade debt securities with 1 year or less to maturity. Preferred stock and ADRs are equity securities.

Which of the following securities is not exempt from the registration provisions of the Securities Act of 1933?

A new stock being offered in three states

Which of the following is the safest from default risk?

AAA-rated unsecured bond - The more AAA's the better

An investor would like to make a long-term investment in a debt security whose duration is shorter than its maturity. Which of the following AAA-rated bonds should his registered representative recommend?

ABC 8% 10-year bond maturing in 5 years

Under Rule 506(b) of Regulation D, when is advertising permitted?

Advertising (general solicitation) is never permitted under Rule 506(b).

One of your clients tells you that he is trading in the fourth market. Who is he trading with?

An institution

Qualified investors for a Regulation A Tier 2 offering must meet certain requirements. Which of the following is not one of those requirements?

Be a registered investment advisor

The managing underwriter has indicated that it is unlikely the issuer can sell $100 million of common stock to the public. In which of the following types of offerings does a syndicate have no financial obligation for unsold securities?

Best Efforts - In a best efforts underwriting, the underwriter serves as an agent with no financial obligation for unsold securities. In a standby underwriting, the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment).

An offering of a new issue in which the underwriters act as agents for the issuer is called what?

Best efforts - In a best efforts underwriting the underwriters act as an agent selling the securities to the customer directly from the issuer. In a best efforts underwriting the underwriter takes no responsibility for any unsold shares.

An investor thinks ABC stock is going up and would like to use leverage to profit from his belief. You recommend which of the following?

Buy calls on ABC stock - The investor is bullish on ABC stock, believing it is going to rise in value. Buying calls (call up!) allows the investor to control a lot of ABC stock by paying a small premium, therefore leveraging the position.

All of the following are examples of a nonexempt security except

BuyStuff Corporation 90-day commercial paper.

Which of the following actions are the responsibility of an investment bank?

Distributing large blocks of stock to the public and to institutions Raising long-term capital for corporations by underwriting new issues of securities

Which of the following is not permitted during the cooling-off period?

Distributing sales literature

Which of the following is not a criteria for an offering under the Intrastate Offering Rule (Rule 147)?

Eighty percent of the issuer's employees must be located in the state.

Listed securities primarily trade in which of the following venues?

Exchanges

An offering of a new issue in which the underwriters act as principals is called what?

Firm commitment

ALFA Securities is the managing underwriter for an initial public offering of one million shares of ABC common. It has agreed to sell all the stock being offered and to buy, as principal, any stock it cannot sell to the public. ABC will receive the proceeds from the sale of one million shares. This arrangement is known as what type of underwriting?

Firm commitment - A firm commitment underwriting requires the underwriters to purchase all the securities being offered for resale to the public.

Which of the following is an exempt issuer under the Securities Act of 1933?

First National Bank of Arizona - National and state banks are exempt issuers under the act. Corporations and bank holding companies or bank subsidiaries like a broker dealer are not exempt issuers.

An investor who desires minimal credit risk and monthly interest income should consider an investment in which of the following?

Ginnie Maes

Which of the following describe how prices are arrived at in the securities markets?

I. By auction in the exchanges III. By negotiation in the OTC markets

Which of the following bonds qualify as municipal bonds?

I. General obligation bond of the City of Denver IV. Highway bond issued by the State of New Mexico Any bond issued by a state, municipality, or governmental unit other than the federal government or one of its agencies is categorized as a municipal issue.

Which of the following statements regarding Treasury bills are true? They are sold at auction.

I. They are sold at auction. III. They mature at par.

During the cooling-off period of a securities registration, the underwriters will generally distribute a preliminary prospectus. This document

I. may contain incomplete information. II. will not contain the effective date.

All of the following are characteristics of convertible bonds except

III. the coupon is invariably higher than similar nonconvertible corporate bonds. IV. at issue, the conversion price is set lower than the market value of the underlying stock.

Which of the following, though issued by a municipality, is not backed by its taxing authority?

Industrial development bond - An industrial development bond is issued by a municipality to provide funding for a business or a commercial facility, which is then leased to a business enterprise. The interest and principal of the bond are then paid off by the business enterprise, not the municipality.

An investor requests a preliminary prospectus for a new issue. Regarding the document, which of the following is true?

It is made available between the registration date and the effective date.

Which of the following statements regarding the Securities Exchange Act of 1934 is not true?

It requires registration of securities.

Which of the following is an exempt security?

MNO Corp 90-day commercial paper

Which of the following are characteristics of commercial paper?

Maximum maturity of 270 days Exempt from registration