All Chapters Flashcards

Question

Research department (Structure of Securities Firm)

Answer 1

Analysts in a firm's research department study both the markets and individual issuers in order to issue recommendations. The typical recommendations are to buy, sell, or hold.

Answer 2

Bonds or fixed income

Answer 3

Trading professionals who execute trades for both the firm's clients and the firm's own account (on the secondary market)

Answer 4

Information not to be shared between different departments. (leak of information)

Answer 5

A broker-dealer who chooses to display quotes to buy or sell a specific amount of securities at specific prices. Quotes are firms for at least 100 shares. (equity securities). Example: Brokerage firm says "I'm a market-maker in apple" means they stand ready to buy and sell a set amount of securities for Apple specifically.

Answer 6

A round lot

Answer 7

1000 shares

Answer 8

The client's selling (liquidation) price. If the client is willing to sell then the Market Maker (MM) will buy from them at this price

Answer 9

Represents a client's purchase price. This is the price a Market Maker (MM) will sell

Answer 10

Spread. Represents the profitably of the Market Maker (MM). Example: Bid price: $17.05 Ask Price: $17.15. Spread is $.10.

Answer 11

1 Round lot (100 shares)

Answer 12

From the spread

Answer 13

A firm that charges a fee for managing a client's securities portfolios

Answer 14

Assets Under Management (AUM)

Answer 15

Broker-Dealer

Answer 16

A person who advises on municipalities on bond offerings and must be registered with the SEC (typically advises state, county, or city (issuers) regarding the structure and timing of a new offering)

Answer 17

Assets under management

Answer 18

The state in which it conducts business

Answer 19

With either SEC or the state(s) in which they conduct business

Answer 20

The amount of assets they have invested

Answer 21

Institutional Investors

Answer 22

Banks, Insurance companies, investment companies, corporations, partnerships, individual investors with a certain amount of money invested, registered investment advisers, public and private pension plans, hedge funds.

Answer 23

Individual investors who are not defined as institutional investors are considered "retail investors." (non-institutional investor)

Answer 24

an institution or individuals who have met the financial test: Net worth of: $1,000,000 excluding their primary residence OR Annual income of: $200,000 in each of the last two years ($300,000 married couples)

Answer 25

a buyer (not an individual person) must own and invest a minimum of $100 million of securities

Answer 26

SEC, Securities Act of 1933

Answer 27

(the beginning of securities) The issuance of securities by investment bankers. The bankers will assume the role of underwriter by agreeing to market the shares to the ultimate investor.

Answer 28

The Secondary Market, brings together the buyer and the sellers. The funds are no longer directed to the issuer, they are passed between investors.

Answer 29

No, the money goes to whoever held the stock before you bought it

Answer 30

Securities exchange act of 1934

Answer 31

NYSE (New York Stock Exchange), NASDAQ, or OTC (over-the-counter)

Answer 32

Exchanges, listed securities

Answer 33

OTC (over-the-counter) market, OTCBB (over-the-counter bulletin board, and pink markets

Answer 34

Brokerage firm. Buys the securities from the issuer and sells directly to the investor. They assume liability and signs an underwriting agreement with the issuer.

Answer 35

To raise capital

Answer 36

Initial Public Offering, a company going public for the first time

Answer 37

When a company did not sell 100% of the company during the IPO and they want to sell more in the future (point in time) it is called a "Follow-On."

Answer 38

specialist or Designated Market Maker (DMM)

Answer 39

The auctioneer who controls trading in a given stock

Answer 40

Stocks that don't qualify for listing on either a physical or electronic exchange: NYSE. They are considered to be trading on OTC (over-the-counter). Referred to as OTC Equities or unlisted securities. NASDAQ is included in dealer-to-dealer market.

Answer 41

In a nonphysical location. Dealer-to-Dealer networks connect participants through phones or computers

Answer 42

Non-physical; phone and computer network, Negotiated market, unlimited number of registered "market makers," classified as a securities exchange

Answer 43

Often low-priced and thinly traded (penny stocks).

Answer 44

OTC Pink Markets, may be reporting or non-reporting companies

Answer 45

100 shares (1 round lot)

Answer 46

Execute trades for their firm or the firm's clients and they do not maintain an inventory.

Answer 47

Listed securities traded OTC or away from traditional exchanges. Accomodates after-hour trading

Answer 48

Fourth Market, typically setup by money managers

Answer 49

Dark Pools, anonymous trading. Quotes are not disseminated to the public. Provides liquidity for large institutional investors and high frequency traders. Limits impact on the public markets

Answer 50

NYSE has 1 (designated market maker) and NASDAQ has unlimited

Answer 51

Market Makers, Traders

Answer 52

$1,000,000 and $200,000 ($300,000 couples)

Answer 53

Underwriter (brokerage firm)

Answer 54

Settlement

Answer 55

Clear the trade

Answer 56

Settlement

Answer 57

DTCC (depository trust & clearing corporation)

Answer 58

DTCC (depository trust & clearing corporation)

Answer 59

DTCC (depository trust & clearing corporation)

Answer 60

Clearing Firms, responsible for maintaining client assets, record keeping, establishing a separate account for each client, sending confirmations, statements, and checks.

Answer 61

Clearing Firms

Answer 62

Fully Disclosed (versus omnibus)

Answer 63

Omnibus accounts (versus fully disclosed)

Answer 64

DTCC (Depository Trust & Clearing Corporation)

Answer 65

OCC (Options Clearing Corporation)

Answer 66

Prime Brokerage, a primary B/D provides a large client (i.e., hedge funds) with the ability to clear all trades through a centralized firm with executions occurring with multiple (broker-dealers). This prevents a single firm from determining the client's strategy.

Answer 67

Accredited Investors

Answer 68

A. maintaining the issuer's ownership register for each issue of it securities. Maintaining the issuer's ownership register for each issue of its securities is the responsibility of the registrar. In doing so, the registrar records the name, address, and tax identification or Social Security number of each individual owner. All of the other choices are the responsibility of the transfer agent.

Answer 69

D: Make recommendations as to which companies investors should purchase or sell. The analysts in a firm’s research department study both the markets and individual issuers in order to issue recommendations. As a result, the analysts make recommendations regarding which company's stock an investor should buy, sell, or hold. The other choices are all activities that are performed by a firm's investment banking department.

Answer 70

Custodian, Banks or financial institutions. Assets can be held in physical form or in book entry (electronic) forms

Answer 71

Registrar and Transfer Agents

Answer 72

Registrar, they will also ensure the corporation does not issue more shares than the number of authorized shares.

Answer 73

Transfer agent

Answer 74

Introducing Firm

Answer 75

A commission, When a broker-dealer executes an agency trade, it matches up the buyer and seller and earns a commission. For executing principal trades, a broker-dealer earns either a markup or markdown.

Answer 76

B. If the corporation has sufficient funds, it will pay the owners a cash dividend. A debt security or bond is a security that represents the amount of indebtedness (principal) that the issuer owes to the investor. Investors who purchase bonds are considered creditors of the issuer and are essentially lending their funds to the issuer for a specified period (until maturity). The issuer is required to repay the principal balance of the bond at a future date and will typically make interest payments over the life of the loan. If the issuer misses an interest or principal payment, it’s considered to be in default. Equity securities (not debt securities) pay cash dividends. (14029)

Answer 77

A. Any person that buys a security from or sells a security to a customer from/for its own account A "dealer" is defined as any person that engages in the business of buying and selling securities for its own account. On the other hand, a "broker" is defined as any person that engages in the business of effecting agency transactions in securities for the account of others. (14032)

Answer 78

A. An institutional investor Institutional investors are typically large entities that pool their money to purchase securities. Institutional investors include banks, insurance companies, pension plans, endowments, and hedge funds. FINRA’s “institutional account” definition also includes an account of an individual or other entity with total assets of at least $50 million. (14040)

Answer 79

SEC, SROs are the every day cops of the SEC

Answer 80

Federal Reserve Board (FRB) a.k.a the "Fed." The Fed is responsible for controlling monetary policy: money supply and interest rates. Goal is to create maximum employment and stable prices. Tools include: open market operations, discount rate, reserve requirements, and Regulation T.

Answer 81

The discount rate, they influence a lot of other interest rates, but the discount rate is the only one they set.

Answer 82

FDIC (Federal Deposit Insurance Corporation)

Answer 83

State (Blue-Sky) Regulation. State Administrator (sometimes called Commissioner) enforces the Uniform Securities Act (USA). The USA is a model law, not the actual law of any state.

Answer 84

Focuses on protecting investors from Fraud and to responsible for creating the provisions and update the USA (uniform securities act).

Answer 85

The Securities Act of 1933

Answer 86

The Securities Act of 1933, registration exemptions are provided to issuers of certain securities and specific types of transactions

Answer 87

The Securities Act of 1933

Answer 88

Securities Exchange Act of 1934. The specific provisions. Margin requirements (Reg T), Registration requirements for B/Ds (broker-dealers) and RRs (registered representatives), Trading Regulations, and Insider Regulations.

Answer 89

Advice - provides advice about securities, including asset allocation, Business - As a regular business, and Compensation - receives compensation for the advice. The IA definition includes firms that manage wrap accounts (i.e., they collect a single fee for providing advice and executing transactions).

Answer 90

Investment Adviser

Answer 91

Civil, they can fine you, but they cannot imprison you. DOJ (Department of Justice) would be the ones to imprison you at the request of the SEC.

Answer 92

SIPC (Securities Investors Protection Corporation)

Answer 93

SIPC (Securities Investors Protection Corporation)

Answer 94

SIPC (Securities Investors Protection Corporation)

Answer 95

SIPC (Securities Investors Protection Corporation)

Answer 96

$500k total.

Answer 97

$350k total (Full $100k in securities and $250k in cash)

Answer 98

Phil is seen as one customer. His cash and margin account would be covered together for a total coverage of upto $500k in securities and up to $250k in cash. under sipc.

Answer 99

No. SIPC only covers Securities.

Answer 100

Yes. Phils 2 accounts have the standard coverage of $500k in securities and up to $250k in cash. The joint account with be treated as a separate customer and have its own coverage of up to $500k in securities and up to $250k in cash.

Answer 101

$300k since that is the only cleared funds.

Answer 102

Insider Trading and Securities Fraud Enforcement Act 1988

Answer 103

Investment Company Act of 1940

Answer 104

USA Patriot Act of 2001, also requires the filing of reports based on financial transactions.

Answer 105

Penny Stock Reform Act of 1990, also requires firms to establish suitability, approval, and disclosure procedures

Answer 106

Telephone Consumer Protection Act of 1991, Firms must maintain "Do Not Call" lists.

Answer 107

FINRA, Financial Industry Regulatory Authority

Answer 108

FINRA, Financial Industry Regulatory Authority

Answer 109

Standardizes the procedures for doing business in financial markets

Answer 110

Governs the interaction between customers and firms

Answer 111

Establishes the process used to discipline any person who violates FINRA rules

Answer 112

Provides the method for resolving disputes (typically monetary) between members, including those that involve public customers

Answer 113

Broker-dealers and salespersons engaged in municipal business and municipal advertising. MSRB does not apply to municipal issuers

Answer 114

No, for broker-dealers MSRB rules are enforced by FINRA or SEC. For Bank Dealers MSRB rules are enforced by: Comptroller of the currency, FRB, or FDIC

Answer 115

CBOE (Chicago Board Options Exchange), CBOE is a trading venue for: equity options, index options, yield-based options, and ETFs. They are regulated by the SEC.

Answer 116

D. Decreases Short selling is a trading strategy in which an investor sells stock that she doesn't own. The shares are actually borrowed from a broker-dealer. A short seller’s belief is that the stock will decline in value (bearish) which will allow her to purchase the borrowed stock at a lower price and deliver it back to the broker-dealer. (14054)

Answer 117

C. Provide the name of the SIPC trustee. When an account is opened, a broker-dealer must provide all new customers with written notification that they may obtain information about SIPC by contacting the insurer. The firm must provide customers with both the SIPC’s website address and a telephone number that may be used to obtain the referenced information. This information includes the SIPC brochure which is a detailed document that explains coverage under the insurance program. The name of the SIPC trustee is only provided if the broker-dealer declares bankruptcy. (14062)

Answer 118

B. Stocks held by the customer in his name The purpose of the Securities Investor Protection Corporation (SIPC) is to protect investors from broker-dealer bankruptcy. In most circumstances, SIPC will protect cash and securities (e.g., options, stocks, and bonds). SIPC coverage doesn’t apply to any securities that are specifically identifiable as belonging to a customer since these types of securities are distributed to the customer without regard to the dollar limits. SIPC coverage generally applies to securities that are held in street name (i.e., in the name of the broker-dealer on behalf of the customer). (14057)

Answer 119

B. The written supervisory procedures (WSP)manual Compliance professionals are responsible for creating their firms’ house rules that form the basis of the Written Supervisory Procedures (WSPs). A firm’s WSP is essentially a manual which details the rules and identifies the person(s) responsible for enforcing these rules. (14069)

Answer 120

C. An OTC equity with a price of $4.75 Penny stocks are defined as non-exchange-traded securities (i.e., OTC equities) that trade for less than $5 per share. Since penny stocks are often risky investments, industry rules require firms to obtain a signed disclosure document from potential buyers which states that they understand the risks involved. (14066)

Answer 121

Board of Directors (BOD), they are responsible for overseeing the company and appointing senior managers.

Answer 122

Articles of incorporation (a.k.a. certificate of incorporation or corporate charter).

Answer 123

Debt (bonds) financing or equity financing. An issuer who sells bonds (debt) is borrowing money from the investors who buy the bonds. The funds are borrowed for a predetermined time and the company is required to pay interest over the life of the loan. For equities corporations will offer stock to be purchased to become part owners of the company. Stockholders don't receive guaranteed interest payments and there's no maturity date on their investments.

Answer 124

Cumulative and statutory voting.

Answer 125

Bondholders, Preferred Stockholder, then common stockholder

Answer 126

Preferred and Common Stock holder.

Answer 127

Corporate Charter

Answer 128

10,000,000 shares

Answer 129

The BOD (Board of Directors) has to approve it and then shareholders have to approve it as well

Answer 130

Treasury Stock.

Answer 131

No. Since the company has bought those shares back there are no person(s) to receive the dividends or to submit a vote. The company now re-owns those stocks.

Answer 132

Multiply the current market price by the number of outstanding shares.

Answer 133

$1 per share

Answer 134

Par. It is an arbitrary amount and is used for the companies financial statement. There is no relationship between par value and market value of an equity security.

Answer 135

$1.25 per share

Answer 136

Right of Inspection (inspect the books), They can also review the list of stockholders and minutes of the stockholders meeting.

Answer 137

A certificate, it states the name of the corporation, the name of the owner, and the number of shares that are owned by the stockholder. However, most people buy stocks via a brokerage firm and the certificate will be held in "street name."

Answer 138

Common stock, Stockholders have the right to freely transfer their shares by selling them (secondary market), giving them away, or bequeathing them to heirs. There are some cases where they are not freely transferrable: when a person buys shares before the company's initial public offering (IPO) or acquires shares as part of their work compensation. Typically these restricted shares will come with a warning.

Answer 139

No, the company determines whether or not they will pay the stockholder a dividend. If the company is not profitable they may reinvest back into the company versus paying the common stockholder dividends.

Answer 140

Election of the board members and authorization of additional shares and stock splits (but not dividends)

Answer 141

Statutory, they receive one vote, per share, per issue.

Answer 142

Right of inspection, Right to receive dividends (or participation in corporate earnings), right to transfer ownership, Right to evidence of ownership, and Right to Vote.

Answer 143

Cumulative, this is beneficial for small shareholders. They can take all of their votes for 1 or 2 members for the board.

Answer 144

Restricted Securities, stop-transfer instructions are issued and a legend on the certificates indicates that the securities are unregistered. Also a purchaser must sign the letter to acknowledge (or lock-up agreement) that the shares cannot be resold within a defined period.

Answer 145

Restricted Securities. The senior executive had to sign the lock-up agreement where they cannot be resold for a certain period of time.

Answer 146

Restricted Stock, minimum 6 month holding period. You are unable to share them until the holding period is over.

Answer 147

Control (affiliated) Stock. There is no minimum required holding period.

Answer 148

A control person

Answer 149

Every 90 days. The SEC must be notified and a filed 144 Form.

Answer 150

1% of the outstanding shares or the average weekly trading volume over the last 4 weeks.

Answer 151

Selling no more than 5,000 shares and $50,000 securities

Answer 152

Refile an updated 144 form

Answer 153

No. It is less than 5,000 shares being sold and a value of $36,000 (less than $50,000 in securities).

Answer 154

Yes. There is no minimum required holding period.

Answer 155

No, he has a minimum 6 month holding period.

Answer 156

The maximum sale is the greater between 1% of the outstanding shares or the average weekly trading volume over the last 4 weeks. You would not count the volume traded on 01/31, You add only the last 4 weeks of volume traded: 62,000+60,000+56,0000+58,000= 236,000 You then divide that by 4 = 59,000 1% of 5,700,000 outstanding shares = 57,000 59,000 is greater!

Answer 157

ADR, (American Depositary Receipts), Priced in U.S. Dollars, Pay Dividends in U.S. Dollars, and sponsored or unsponsored.

Answer 158

U.S. Exchanges (NASDAQ or NYSE). They are issued in cooperation with a foreign company. A foreign company will pays a depositary bank to issue ADR shares in the U.S. Many of the largest ADRs are sponsored.

Answer 159

Generally trade in OTC market (OTCBB or OTC Pink Market).

Answer 160

U.S. Banks.

Answer 161

Dividend rights, but do not receive preemptive rights.

Answer 162

Brokerage Firms, they will cover the cost of the ADR and have them trade on the OTC market (OTCBB or OTC Pink Market)

Answer 163

Defensive. Defensive stocks perform well regardless of the current economic environment. Industries include: necessary services (utilities), production of consumer staples (tobacco, pharmaceuticals, soft drinks, and candy), and essentials (food).

Answer 164

Blue-Chip Stock, Blue-Chip stocks are high-grade issues of major companies that have long and unbroken records of earnings and dividend payments. The term is used to describe the common stock of large, well-established, stable, and mature companies that have great financial strength.

Answer 165

Cyclical Stocks, Cyclical stocks are associated with companies whose earnings fluctuate with the business cycle. When business conditions improve, the company's profitability is restored and the price of its common stock rises. However, when conditions deteriorate, business for the company falls off sharply and its profits are diminished. This causes the stock's price to decline. Examples of companies whose stock is considered cyclical include household appliance, steel, construction, and automobile companies.

Answer 166

Income Stocks, Income stocks are issued by companies that pay higher-than-average dividends in relation to their market price. This type of stock is generally attractive to investors, particularly the elderly and retired, who are interest in current income as opposed to capital appreciation. Utility stocks are often placed in the income stock category.

Answer 167

Growth stocks. Typically this type of company is aggressive, research minded, and retains most of its earnings to finance expansion and, therefore, pays little or no cash dividend.

Answer 168

Common Stock, Preferred Stock does not have voting rights!

Answer 169

Preferred Stock, If the company is able to pay the dividend it typically will pay the same amount. The dividends are not guaranteed. Dividends are stated as a percentage of par. Par Value is typically $100. Example the company will pay 3% in dividends. Meaning $3 will be paid over a period of 4 quarters. $.75 per quarter. Dividends to preferred stock holders will be paid before common stockholders.

Answer 170

Preferred Stock is paid before common stock.

Answer 171

Non-cumulative, cumulative, Callable, Convertible, Participating

Answer 172

All of the Preferred dividends that are in arrears (owed) must be paid before the common stockholders receive dividends.

Answer 173

$13 Before the common stockholders receive any dividend payments, the company must pay $13 to the preferred shareholders (the missing amounts of $3 for Year 1, $3 for Year 2, $2 for Year 3, and the full stated $5 for Year 4). The reason year 4 earned $5 is because (as stated in the question) Widget, Inc issued 5% preferred cumulative stock. You take 5% of par value ($100) of the stock = $5.00.

Answer 174

The Current Dividend. The investor is not entitled to previous unpaid dividends Think "non-accumulate"

Answer 175

Unpaid dividends. They are able to receive the dividends "in arrears." before common stock dividends maybe paid. Think "Accumulate"

Answer 176

Only $5 since the preference is limited to the current year’s dividend for non-cumulative preferred stock. Remember, non-cumulative preferred stock is not entitled to any missing or unpaid dividends. The reason year 4 earned $5 is because (as stated in the question) Widget, Inc issued 5% preferred non-cumulative stock. You take 5% of par value ($100) of the stock = $5.00.

Answer 177

Callable, in order to induce investors to buy the stock, the call price is typically higher than the stock's par value.

Answer 178

False, the call price is typically higher than the stock's par value in order to induce investors to buy the stock.

Answer 179

Common and Preferred Stock

Answer 180

Investors may receive additional dividends based on the company's profits. Allows investors to share in dividends paid to common stockholders

Answer 181

Convert Preferred Stock into a predetermined number of common stock.

Answer 182

Dividend paid to Year 1 Year 2 Year 3 8% Preferred $0 $2 $8 6% Cumulative Pfd. $0 $2 $16 Common $0 $0 Any amount For 8% Preferred (non-cumulative) the shareholders were not paid anything the first year and only $2 the second year. Since the dividends do not accumulate (or pay "in arrears") then only $8 in dividends will be paid in year 8. For 6% Cumulative Preferred Stock the shareholders were not paid in year 1 and only $2 in year 2. (They are owed $6 from year 1 and $4 from year 2). In year 3 they will be paid $6 plus the $10 from the previous 2 years for a total of $16. Once the Preferred Stockholders have been paid, the common stockholders can be paid any amount.

Answer 183

The par value ($100) is divided by its conversion price

Answer 184

4 for 1 ($100 or par value divided by $25). The Preferred stockholder will receive 4 shares of common for every 1 share of Preferred Stock.

Answer 185

10 shares, $100 (par value) divided by (conversion price) $10.

Answer 186

No, common stock you are not guaranteed a dividend. With Convertible you do receive a dividend. If the value of the common stock rises then the convertible preferred stock value will rise as well.

Answer 187

It stays the same. The investor will still be able to receive their 4% rate if they are eligible to receive a dividend

Answer 188

$120 per share, Market Value of the Commmon ($12) x Conversion Ratio (10 shares) = $120 per share. Since the price of the common stock has risen to $12, the convertible preferred stock should be trading at $120.

Answer 189

a (common stockholder) shareholder's right to maintain percentage of ownership; no dilution. Distributed through a rights offering and one right for each share. Discounted, Shareholders exercise rights at a price that's below the current market value prior to a public offering Short-term, must be exercised within 4 to 6 weeks. Tradable

Answer 190

0. Preferred Stockholders do not receive any rights. If it was common stock you would receive 1000 rights.

Answer 191

Public Offering, Typically this offered to existing shareholders to buy more at a price below the current market value.

Answer 192

$2 per share

Answer 193

Typically 4-6 weeks (short term)

Answer 194

Same place that the common stock is traded.

Answer 195

Sweeteners

Answer 196

Warrants. They also may be detached and traded separately from the share.

Answer 197

shareholders, short-term, and immediate discount

Answer 198

Issue (new share), long-term, and initial premium

Answer 199

Upon request, a member (brokerage firm) firm must make its balance sheet available to customers in either physical or electronic form (posted to the website).

Answer 200

Before executing a trade in the issuer's securities, a broker-dealer must disclose to its customers if it has a control relationship with the issuer. Meaning you are a broker and your client is going to be purchasing from you shares of Bank of America. And you work for Merrill. You must disclose the relationship to your client.

Answer 201

For the issuer’s purchases to not be considered manipulative, the following conditions must be met: * Only one broker-dealer used * Purchases made late in the day are prohibited (or first purchase of the day) * Purchase price is restricted (the price may not be higher than the highest bid or the last independent transaction price, whichever is higher) * Single-day purchase amount is limited (The total volume on any single day may not exceed 25% of the average daily trading volume (ADTV) for that security)

Answer 202

C. $112 To determine the conversion ratio, the par value of the preferred stock ($100) is divided by its conversion price, $100/$50 = 2 shares of common stock. Since the market price of the common stock is $56 and the preferred stock is convertible into 2 shares of common stock, the preferred stock should be trading at or near $112 (2 shares x $56). (14089)

Answer 203

D. Growth Stock A growth stock is associated with a company whose sales, earnings, and share of the market are expanding faster than the general economy. Since this type of company retains most of its earnings to finance expansion it pays little or no cash dividends. (14081)

Answer 204

B. Be able to purchase the shares at a price that's lower than the subscription price Investors who acquire rights have two viable options. First, the holder may choose to exercise some or all of the rights. Second, the rights may be freely transferred (traded) since they typically trade in the same market as the underlying stock. If exercised, the investor is required to purchase the shares at the subscription price. (14092)

Answer 205

C. 90,000 Under Rule 144, the maximum number of shares that may be sold over any 90-day period is the greater of 1% of the total shares outstanding or the average weekly trading volume during the four weeks preceding the filing. Since 1% of the 9 million outstanding shares is 90,000 shares and this amount exceeds the four-week average of 75,000 shares, the person is permitted to sell 90,000 shares. (14080)

Answer 206

B. 1,000 Because there are four open seats on the board, there are four voting issues. With statutory voting, a shareholder is given one vote, per share owned, per voting issue; therefore, she's able to cast 1,000 votes for each of four candidates. On the other hand, with cumulative voting, the shareholder is able to multiply her shares owned by the number of voting issues (1,0000 shares x four voting issues) and cast her 4,000 votes in any manner she chooses. (14075)

Answer 207

B. Secured creditors, administrative claim holders, unsecured creditors, preferred stockholders, common stockholders In both Chapter 7 and Chapter 11 bankruptcy proceedings, a corporation’s secured creditors have the highest claim. Administrative claim holders are paid next, followed by unsecured creditors, then preferred stockholders, and finally common stockholders. (14071)

Answer 208

A. Both restricted securities and control securities must be sold according to the provisions of Rule 144. Both restricted securities and control securities must be sold according to the provisions of Rule 144. (14078)

Answer 209

D. $6 If the common stock's market price is above the warrant’s subscription price, then the warrant has intrinsic value. In this case, the intrinsic value is $6 ($56 - $50). (14094)

Answer 210

B. 2,500 shares of common stock The par value of preferred stock is assumed to be $100. To determine the conversion ratio (i.e., the number of shares to which an investor is entitled), the par value of the preferred stock is divided by its conversion price. In this case, it's $100/$20 = 5 shares of common stock. Since the investor owns 500 shares of the convertible preferred stock and each share is convertible into 5 shares of common stock, the investor will own 2,500 shares of common stock (500 x 5 shares) if he converts. (14088)

Answer 211

C. $1,500 Preferred stock is typically issued with a par (face) value of $100 and a dividend that's expressed as a percentage of that par value. A 6% preferred stock is expected to pay an annual dividend of $6 (6% of the par value of $100). Since the investor owns 1,000 shares, the annual dividend is $6,000 and therefore the quarterly payment is $1,500. (14084)

Answer 212

C. 9:30 a.m. SEC Rule 10b-18 is the safe harbor (procedures that must be followed to ensure manipulation rules are not violated) when a issuer buys it own stock in the secondary market. One of the conditions is the time during which the issuer is not permitted to purchase shares. The prohibited times are the first reported transaction for that day, and during the last 30 minutes of the normal trading day. However, if the stock is actively traded, the purchase prohibition changes to within the last 10 minutes of the trading day. The trading day is 9:30 a.m. to 4:00 p.m. ET. (14097)

Answer 213

A. None In a rights offering, all existing common stockholders automatically receive one right for every one share they own. However, since the investor in this question owns preferred stock, she will not receive any rights. (14091)

Answer 214

D. $34.55 SEC Rule 10b-18 is the safe harbor (procedures to follow to ensure manipulation rules are not violated) when a issuer buys it own stock in the secondary market. One of the conditions is the price of the purchases cannot be higher than the highest independent bid or the last independent transaction price, whichever is higher. The highest price at which the issuer can buy back its stock is $34.55 since it's higher than $34.50. (14098)

Answer 215

A. A company that manufactures household appliances Cyclical stocks are associated with companies whose earnings fluctuate with the business cycle. When business conditions improve, the company’s profitability is restored and the price of its common stock rises. Examples of companies whose stock is considered cyclical include household appliance, steel, construction, and automobile companies. Candy companies and grocery stores chain are examples of defensive companies. (14082)

Answer 216

B. A lock-up agreement A lock-up agreement dictates the amount of time that pre-IPO investors (e.g., private placement buyers, management, venture capitalists, and other early investors) must wait before selling their shares after the company has gone public. The lock-up is designed to prohibit these investors that initially funded the company from immediately liquidating their shares for a profit once the issue goes public. (14076)

Answer 217

Loan, debt

Answer 218

A borrower (company, municipality, etc) needs money. They will issue a bond. Investors will lend money by purchasing the bond. A bond represents a loan or debt obligation of an issuer (the borrower).

Answer 219

Creditor. They are not seen as an owner. Why would someone become a creditor. They receive semi-annual interest payments. They also will receive payments back before stock holders if the company files for bankruptcy.

Answer 220

Repayment of the principal at maturity + responsible for the interest payments of the life of the bond.

Answer 221

Semi-annually

Answer 222

Borrower borrowed $1,000. The borrower will pay $100 annually in interest (10%). The Interest rate is a fixed percentage of par. Stated annually but paid semi-annually ($50 every 6 months)

Answer 223

Coupon or nominal yield, The rate of interest is generally fixed at the time of the bond is issued and, with some exceptions, remains the same for the life of the bond. Exceptions include bonds that are issued with variable (or floating) rates or as zero-coupons.

Answer 224

Last interest payment and the principal (par amount) of the bond.

Answer 225

Unsecured corporate debt (bond).

Answer 226

$1,000 or par value

Answer 227

Interest rates or coupons

Answer 228

Term or Serial; for both types, bonds are issued on the same date and interest is paid each year

Answer 229

Term Maturity

Answer 230

Serial Maturity

Answer 231

Level Debt Servicing

Answer 232

Discount. Typically the longer the maturity the deeper the discount.

Answer 233

1st and the 15th

Answer 234

They will be higher, so it allows the borrower to synchronize to the 1st and 15th of the month.

Answer 235

Long coupon

Answer 236

Short coupon

Answer 237

30 Days in a month and 360 days in a year

Answer 238

Actual days in the month and 365 days in a year

Answer 239

Interest is paid in one lump sum when the bond matures and for investors who desire a lump sum at some future date. The zero-coupon bonds do not have annual or semi-annual interest

Answer 240

Pay interest at regular intervals and for investors who desire current income

Answer 241

Flat, when you buy a zero-coupon bond from other investors you pay them the full price of the bond + interest on however many months the investor you are buying the bond from held the bond.

Answer 242

True. Zero-coupon bonds are not subject to reinvestment risk.

Answer 243

Zero-coupon bond.

Answer 244

Interest-rate risk and credit risk

Answer 245

Interest-rate and bond prices. If an interest-rate changes then the bond price will change in the opposite direction.

Answer 246

The bond will most likely be traded at a discount.

Answer 247

The bond will most likely be traded at a premium

Answer 248

Inverse relationship.

Answer 249

$945.00, The bond is trading at a discount and interest rates have risen since the bond was issued.

Answer 250

An issuer may default and may not be able to meet its obligation to pay interest and principal bondholders. Issuers that are considered high credit risks must pay a higher rate of interest in order to induce investors to purchase their bonds

Answer 251

U.S. Government

Answer 252

Lower and higher

Answer 253

A bond's credit rating helps determine this. Rating agencies: Standard and Poor's, Fitch Rating, and Moodys

Answer 254

BBB, A, AA, AAA

Answer 255

Baa, A, Aa, Aaa

Answer 256

Higher yield

Answer 257

The issuer pays for the rating.

Answer 258

1%, they trade in increments of 1/8th of a point or $1.25

Answer 259

1/32nd, Example a quotation is 87.24 the fractional is 87 24/32nds of a point. The decimal is 87.75% Its dollar price is $877.50

Answer 260

Fractional is 106 4/32nd, the decimal is 106.125%, the dollar price is $10,612.50

Answer 261

Lower. Lower yield is a higher price.

Answer 262

Fixed rate. Rate is the same as the coupon.

Answer 263

annual interest divided by current market price

Answer 264

Maturity, Same as basis and yield, includes the reinvestment of annual interest and the gain or loss over the life of the bond.

Answer 265

.01%, example: 100 basis points = 1.00%

Answer 266

Nothing it stays the same when the bond is trading at par.

Answer 267

Yield to Maturity (YTM).

Answer 268

Nominal yield since it stays the same.

Answer 269

They are the same

Answer 270

Call provision and Put provision

Answer 271

Issuer has a call provision. Typically are used when interest rates are falling. Issuers will use this to avoid paying a higher yield in the interest rates fall. They will buy lower interest rate bonds to payoff the higher interest bond (refinancing). Investors will be compensated by having a higher yield on a bond.

Answer 272

Premium. Will pay above par value to have the call provision on the bond.

Answer 273

yield (interest rate)

Answer 274

Rise. This allows the bondholders to redeem their bonds at values greater than market value.

Answer 275

Par Value, shares of the company's common stock.

Answer 276

Safety of Principal and potential stock growth

Answer 277

To pay a lower coupon rate

Answer 278

The number of shares the investor will receive at conversion

Answer 279

50 shares, $1,000 (par value) divided by $20 (convertible price) = 50 shares

Answer 280

equivalent market values. Price of convertible bond = aggregate market value of the common stock into which it can be converted.

Answer 281

25 shares, $1,000 divided by $40 = 25 shares

Answer 282

$1,125, 25 shares x $45 = $1,125

Answer 283

$1,100 divided by 25 shares (conversion ratio) = $44 per share

Answer 284

If the bond is available at a discount to parity. Less than $1,125

Answer 285

A. $80.00 per $1,000 of face amount The bonds have a coupon rate of 8%, which means that they pay 8% of their par value ($1,000 x 8%), which is $80 each year in interest payments per $1,000 of face amount. (24045)

Answer 286

C. Semiannually Most issuers pay interest on bonds semiannually. (14101)

Answer 287

B. 50 shares In order to determine the conversion ratio (the number of shares received if a bond is converted), the bond's par value is divided by the conversion price. In this question ,the bond is convertible into 50 shares ($1,000 ÷ $20). (24061)

Answer 288

C. A premium There's an inverse relationship between a bond's yield and its price. If the bond has a 5% coupon and its yield (YTM) has now declined to 4.5%, then the price has increased from its original issue price and is now trading above par (at a premium). When the YTM is lower than the bond's coupon rate, the price is high; however, when the YTM is higher than the bond's coupon rate, the price is low. (24058)

Answer 289

B. Any gain is taxable when the bonds are converted. A taxable event doesn't occur when the bonds are converted; instead, the taxable event occurs when the stock is subsequently sold. Convertible bonds typically have lower coupons than non-convertible bonds. If the bonds are called, bondholders are forced to decide whether to convert the bonds. Also, if the bonds are converted the issuer no longer has a responsibility to pay the interest and principal on the bonds. (14114)

Answer 290

C. Interest and principal payments that are equal each year When the combined annual interest and principal payments on a bond offering are essentially equal each year, the bond is considered to have level debt service. This is the structure for many serial bond maturities. (24070)

Answer 291

A. The issuer is likely to exercise a call provision when interest rates are falling. Call provisions are controlled by the issuer (not the bondholder) and are likely to be exercised when interest rates are falling. By calling outstanding bonds, the issuer is able to refinance its existing bonds with new bonds that have a lower coupon rate. (14111

Answer 292

B. Credit risk Credit risk, also referred to as default risk, is the risk that a issuer may be unable to meet its debt service obligations. (14110)

Answer 293

C. They're appropriate for investors who are seeking current income. Zero-coupon bonds are issued at a discount from par value, they pay interest as a lump-sum when the bond matures, and are appropriate for investors who are seeking a single lump-sum at a future date. Since interest is not paid annually, zero-coupon bonds are not appropriate for investors who are seeking current income. (14104)

Answer 294

C. The interest that's due over the bond's life and the principal that's due at maturity A bond's debt service is the total of all interest payments over the bond's life and the principal that's due at maturity. (14099)

Answer 295

A. She receives 25 shares. In order to determine the conversion ratio (the number of shares received if a bond is converted), the bond's par value is divided by the conversion price. When the bond is converted into stock, the investor will receive 25 shares ($1,000 ÷ $40). The conversion itself is not a taxable event and the investor will not realize a gain or loss until the shares are sold. (24066)

Answer 296

B. It's greater than the price of a traditional bond. The price of a bond with a put feature is generally greater than the price of an otherwise equivalent traditional bond. This is due to the fact that the holder can force the issuer to redeem the bond prior to maturity if interest rates rise. (24043)

Answer 297

D. A bond with a put provision A bond with a put provision is advantageous to investors (bondholders) since it allows them to force the issuer to repurchase the bond in the event that interest rates increase, which would result in a decrease to the bond's value. On the other hand, bonds with call provisions are advantageous to issuers since it allows them to retire their bonds prior to maturity. If a bond has no call provision, it doesn't pose an advantage to either the holder or issuer of the bonds. (24068)

Answer 298

C. Lower on the bond with the short maturity, but higher on the bond with the longer maturity Short-term bonds typically have lower coupons than long-term bonds that are issued at the same time since the investor's funds are at risk for a longer period. (14100)

Answer 299

B. The prices of long-term bonds are more volatile than short-term bonds. Since long-term bonds must adjust their prices over a longer period, their prices tend to be more volatile than those for short-term bonds. Don't confuse this with the yield on bonds, where short-term yields are more volatile than those on long-term bonds. (14109)

Answer 300

C. Catastrophe Due to the unpredictability of an occurrence, catastrophe calls are not required to be disclosed on a confirmation. (14113)

Answer 301

D. The bondholder is likely to exercise a put provision when interest rates are rising. Put provisions are controlled by the bondholder (not the issuer) and are likely to be exercised when interest rates are rising. This provision allows the bondholders to reinvest their funds at higher yields. (14112)

Answer 302

D. Long coupon In some cases, a bond's first coupon is for less than six months and is referred to as a short coupon. However, if the first coupon is for more than six months, it's referred to as a long coupon. (14102)

Answer 303

C. Term maturity A bond offering that's issued on the same date and matures on the same future date is referred to as a term maturity. (14107)

Answer 304

U.S. Government, this are "risk free return." Highly liquid market, meaning it is easy to get your money out. (No Credit Risk). Interest on Treasuries are subject to Federal Taxes. Exempt from State and local taxes.

Answer 305

T-Bills, T-Notes, and T-Bonds. T-Notes and T-Bonds are interest-bearing securities that have all of the attributes of traditional fixed-income investments. They pay a fixed rate of interest semi-annually and the investors receive face value of maturity. T-Bills do not pay periodic interest. Issued at a discount and mature at face value.

Answer 306

T-notes and T-Bonds

Answer 307

$100, and then for higher amounts need to be in multiples of a $100

Answer 308

T-Notes. Maturity is 2 - 10 years

Answer 309

In Book Entry Form, meaning there is no physical certificate instead you go on record as owning the bonds, notes, or bills.

Answer 310

Discount. Say a T-Bill is issued at $980 and it matures you would receive $1,000. The $20 difference is the interest.

Answer 311

Semi-annually, Stated annually. The accrued interest is Actual days of the month and 365 days in a year

Answer 312

Secondary market,

Answer 313

Auctioned off weekly

Answer 314

Auctioned off on a Periodic Basis

Answer 315

1/32nd of a point

Answer 316

On a discounted yield basis. In a T-Bill dealer's quotation, the bid's higher yield represents a lower price; the ask's lower yield is a higher price. Meaning it is the discount off of face value. Example: a bid may be 2.94% and an ask may be 2.90%, meaning the Bid is looking for a 2.94% discount off the face value. The ask is actually the higher price.

Answer 317

Treasury Inflation-Protected Securities (TIPS), this allows treasury investors can protect themselves from inflation.

Answer 318

Acquire protection from TIPS (Treasury Inflation-Protected Securities). The coupon rate will stay the same, but the principal adjusts for inflation and deflation, based on CPI

Answer 319

Your principal increases by 1% meaning $1010. The coupon rate stays the same and your annual payment is $40.40. You will also get the adjusted principal at maturity.

Answer 320

Your principal decreases by 1% meaning $990. The coupon rate stays the same and your annual payment is $36.60. You will get at least par value at maturity.

Answer 321

T-Strips, they are non-interest bearing and issued at a discount and mature at face value.

Answer 322

T-STRIPS, a zero-coupon treasury. Issued with a variety of maturities, issued at a discount and matures at face value. Created from T-Notes and T-Bonds

Answer 323

They are issued at an auction. The government sells treasuries through auctions conducted by the U.S. Treasury. Competitive bids are place by large financial institutions and they indicate the quatity and price. Non-Competitive bids are placed by the public, indicate quantity only, Are filled First, and the Bidder agrees to pay the lowest price (highest yield) of the accepted competitive bids.

Answer 324

The Thursday following the auction.

Answer 325

Weekly and are auctioned on Monday or Tuesday.

Answer 326

Next Business day. Newly issued treasuries at sold at auction are settled on the next Thursday

Answer 327

$20 MM (non-competitive), $40 MM at 4.90%, and $40 MM at 5.00%. To equal the grand total of $100,000,000 of the bond offering. Everyone will get the same yield. The highest yield of the winning bid gets the same yield for all Bidders. In this case it is 5%

Answer 328

Agency Securities, they are exempt from state and federal registration, quoted in 32nd's. Accrued interest based on 30 days in the month, issued in book-entry form.

Answer 329

No physical certificate of ownership. Placed on the book of record.

Answer 330

To smooth out treasury cash flows. CMBs are issued at a discount

Answer 331

Farming loans and Morgage-backed securities. Federal Farm Credit Bank (FFCB) provides agricultural loans to farmers. Interest subject to federal tax and exempt from state and local tax. GNMA (Ginnie Mae), FNMA (Fannie Mae), and FHLMC (Freddie Mac) are mortgage-backed securities represent an interest in a pool of mortgages. Monthly payments consist of interest and principal, interest portion is fully taxable (federal, state, and local), and subject to prepayment risk. The most common security issued by government agencies is a mortgage-backed pass-through certificate. Pass-throughs provide excellent credit quality and a slightly higher yield than Treasuries; they are often used to supplement retirement income.

Answer 332

Ginnie Mae (GNMA)

Answer 333

Pass-throughs

Answer 334

States and Political Subdivisions (cities, counties, and school districts), Public Agencies and Authorities (Transit Systems, housing authorities, Water, sewer, and electric system),Territories (Puerto Rico, Guam, and U.S. Virgin Islands).

Answer 335

GO (General Obligation Bonds) and Revenue Bonds. GO Bonds are issued for general purposes to meet any need of the issue, sources for payment of debt service comes from taxes or issuer's full faith of credit. State level: Sales taxes and income taxes, Local level: Ad Valorem (property taxes) assessed value X millage rate = tax bill (1mill=.001), parking or licensing fees. Revenue Bonds: issued to fund a specific project, typical projects: toll roads, bridges, stadiums, and airports. Considered self-supporting debt. Revenue bonds have more risk.

Answer 336

Revenue Bonds

Answer 337

Municipal notes. They are issued to assist in financing a project or to assist a municipality in managing its cash flow. Short-term

Answer 338

SP+1. For Moody MIG stands for Moody investable grade.

Answer 339

Underwriting and underwritings. Even though Municipal bonds are exempt.

Answer 340

Negotiate. Negotiated Sale

Answer 341

Bids for a competitive sale

Answer 342

Syndicate, Syndicate letter addresses: size and type of offering, percentage required to participate, responsibility for unsold commitments of other members of the group

Answer 343

Exempt. Maybe they will be exempt from state and local.

Answer 344

money. The corporation does not give up control or portion of its profits. The disadvantage is that the corporation is required to repay that was borrowed plus interest. Corporate bonds will put investors capital at less risk, but they will not offer the same potential for capital appreciation as common stock

Answer 345

Secured and Unsecured (debentures), Unsecured is typically backed by issuer's full faith and credit. Secured are additionally backed by specific corporate assets.

Answer 346

Mortgage bonds, Equipment Trust Certificates, and Collateral Trust bonds

Answer 347

third-party

Answer 348

Junior, subordinated debentures. Suborinated bondholders will be paid after all the other bondholders.

Answer 349

Secured creditors, administrative expense claims, general creditors, subordinated creditors, Preferred Stockholders, and common stockholders.

Answer 350

Bankruptcy (or reorganization)

Answer 351

USD and outside

Answer 352

Foreign. Registered with SEC and sold primarily in the U.S.

Answer 353

country and currency. Eurodollar Bonds is a type of Eurobonds

Answer 354

the payment of interest and principal

Answer 355

Money Market, Money Market instruments provide safety of principal and liquidity. Suitable for investors who seek safety when intending to make a purchase in the near future or while evaluating different investment options.

Answer 356

foreign, Money Market

Answer 357

Money Market

Answer 358

Money Market

Answer 359

Money Market

Answer 360

C. It's the full faith and credit of another company. Although guaranteed bonds are initially supported by the full faith and credit of the issuer, they're ultimately the responsibility of another company. Neither the U.S. government nor a municipality guarantees the debt service on a guaranteed bond. (24133)

Answer 361

B. State housing agencies Nearly all states have a state housing finance agency that's responsible for issuing housing revenue bonds. (66430)

Answer 362

A. Competitive sale When an issuer uses a bidding process to select an underwriter, it's involved in a competitive sale. When an issuer simply selects an underwriter for its assistance in working out the details of the offering, it's doing so through a negotiated sale. The auction process is used for the issuance of government securities. When an underwriter assumes complete liability for new securities being distributed, it's considered a firm commitment underwriting. (14120)

Answer 363

C. Charges on the benefitted property The interest paid by the issuer to holders of special assessment bonds is derived from charges (assessments) made to the benefitting property owners. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets. (66891)

Answer 364

B. Net lease entered into by an industrial corporation An industrial development revenue bond is backed by lease payments that are made by the corporation renting the facility. In order to analyze this type of bond, the earnings power of the corporation must be judged.

Answer 365

D. Subject to federal income tax, but exempt from state income tax Interest on U.S. government bonds is subject to federal income tax, but exempt from state income tax. This is just the opposite of the tax treatment on municipal (state) bonds where the interest is exempt from federal tax, but subject to state tax. This difference is based on the doctrine of the separation of powers between the federal government and state governments. Each government can tax the interest on its own obligations, but cannot tax the other's obligations. In addition, states typically don't tax the interest received from the debt securities that are owned by residents of that particular state. In effect, that interest is entirely tax-free.(84017)

Answer 366

D. Corporate bonds Interest that's paid on corporate bonds is subject to both federal and state taxation. Interest that's paid on Treasury notes and Treasury Inflation-Protected Securities is subject to federal taxation, but exempt from state taxation. Interest that's paid on municipal bonds is exempt from federal taxation and from taxes within the state in which they're issued. (14132)

Answer 367

C. Moral obligation bond When the state legislature agrees to be responsible for a bond in the event of default, it's referred to as a moral obligation bond. However, the state legislature's moral obligation doesn't mean that it has a legal obligation for the bond. (24075)

Answer 368

C. Put option A VRDO provides investors with the ability to put the security back to the issuer at par value on any date that the interest is adjusted. On the other hand, an ARS allows the investor to sell the security at the auction when the interest is reset, but doesn't guarantee the sale because the auction could fail. Both VRDOs and ARS provide tax-free income, a long-term maturity, and adjustable interest. (24144)

Answer 369

Dividends. Dividends however, are not guaranteed. Dividend payments are determined by the corporations's BOD (Board of Director's)

Answer 370

Declaration date, set by the corporation. Along with Payment date and record date.

Answer 371

Payment date, set by the corporation

Answer 372

Record Date, The transaction must settle on or before the record date. Set by the corporation

Answer 373

The corporation.

Answer 374

Ex-Dividend Date, Stock begins to sell without its dividend (i.e., at a reduced price), Regular-way settlement is assumed.

Answer 375

Buy the dividend.

Answer 376

Declaration Date, Ex-Dividend Date (Same day as record date), Record Date (same day as ex-dividend date), Payment Date

Answer 377

Ex-dividend Date.

Answer 378

The seller remains the stockholder and will receive the dividend. The buyer is entitled to the dividend if a trade is executed prior to the ex-date. When the stock is delivered it will be accompanied by a "due bill." Meaning the seller owes the buyer the payment.

Answer 379

It is payment added to a dividend when the seller fails to deliver the stock by the "record date."

Answer 380

Stock dividends are extra shares of stock. No economic gain or loss for the holders. No change to issuer's capitalization. No change to holder's percentage of equity ownership. No taxability (no income or capital gain). Total basis is unchanged, but basis per share is adjusted.

Answer 381

Currently the investor has a value of $6,000 (total position, 100 shares x $60). After the stock dividend is given he will now own 110 shares. The price per share will now be $54.54 ($6000 divided by 110 shares), the investor will still have a total position of $6,000.

Answer 382

Annual income divided by the current market price. Based on an annual dividend.

Answer 383

4 x $.30 (since it is the price paying quarterly) divided by $40. $1.20/ $40=3.00%

Answer 384

Basis or "the yield" of a bond

Answer 385

Yield-to-maturity

Answer 386

.01%, 100 Basis points =1%

Answer 387

15 Basis points. 2nd bond is trading at 15 basis points higher

Answer 388

YTC (Yield-to-call) or YTM (Yield-to-Maturity).

Answer 389

The bond needs to be callable and the whole bond needs to be callable.

Answer 390

They are all the same.

Answer 391

Yield-to-Maturity

Answer 392

Yield-to-call

Answer 393

Represents the total amount paid to acquire a security. Typically includes commissions and other fees paid.

Answer 394

Trade, Trade. The result of the sale or redemption of an asset if the proceeds exceed the basis (holding period is measured from trade date to trade date). Short-term: Assets that are held for one year or less: Taxed at: ordinary rate. Long-term: Assets that are held for greater than one year: Taxed at: Maximum of 20%.

Answer 395

The result of the sale of an asset if the proceeds are less than the basis.

Answer 396

The original investment back

Answer 397

Stock and Bond, All cash flows from interest of dividends, plus any appreciation in value, (or minus any depreciation). Total Return = (end value - beginning value) + investment income divided by beginning value.

Answer 398

Rate of return - inflation

Answer 399

Rate of retun - Risk-free return

Answer 400

Rate of return generally found on a U.S. Treasury bill

Answer 401

Benchmark, narrow-based indexes focus on market segments, while broad-based indexes attempt to include the entire market, such as: Standard & Poors 500 index - comprised mostly of NYSE stocks: 400 industrial, 20 transportation, 40 utility, 40 financial. Dow Jones Composite - broke down into 3 averages: Dow jones industrial - 30 stocks (most widely quoted and known) Dow Jones Transportation - 20 stocks Dow Jones Utility - 15 stocks

Answer 402

Wilshire Associates Equity Index and Dow Jones Industrial Average. Wilshire Assocaites Equity Index 5,000 stocks. Russell 2000 - focuses on small capitalized stocks, Nasdaq composite index - based on all Nasdaq listed securities, Nasdaq 100 - The 100 largest companies listed on Nasdaq. Bond indexes: Barclay's Capital and other B/Ds have created indexes based on existing bonds in the market Tracking performance: an investor must track how this investments are performing relation to a benchmark or index (e.g., if his investment is up 5%, but the S&P 500 is up 10%

Answer 403

A. The market price of the stock is reduced by $.10 on the ex-date. When a common stock pays a $.10 dividend, the market price of the stock is reduced by $.10 on the ex-date. (14135

Answer 404

C. 400 stocks The Standard & Poor's 500 Index is comprised of 500 stocks that are listed on the NYSE and Nasdaq. Of the 500 stocks, 400 are industrial stocks, 40 are financial stocks, 40 are utility stocks, and 20 are transportation stocks. (14151)

Answer 405

B. The current yield is higher than its yield-to-maturity. When a bond is trading at a premium, the current yield is lower than its nominal yield, but higher than its yield-to-maturity. For a premium bond, the order of yields from lowest to highest is yield-to-maturity, current yield, and nominal yield. (14140)

Answer 406

B. 4% The real interest rate, also referred to as the inflation-adjusted rate of return, measures the true yield of a fixed-income payment after removing the effects of inflation. The formula for calculating the real interest rate is: Actual Return - Rate of Inflation. For this bond, the real interest rate is 4% (6% - 2%). (14149)

Answer 407

B. $40 The formula for determining the amount of interest that a bondholder receives each year is par multiplied by the coupon rate. In this question, the annual interest is $40 ($1,000 x 4%). Keep in mind, the original issue price, the current market price, and the call price are all irrelevant to answering this question. (24181)

Answer 408

C. The short-term gain will be taxed at his ordinary income rate, while the long-term gain will be taxed at a 20% rate. Short-term capital gains (gains on investments held for one year or less) are taxed at the same rates as the person's ordinary income. However, long-term gains (gains on investments held for more than one year) are taxed at a maximum rate of 20%. (14144)

Answer 409

B. $3,000 of the losses can be used to offset ordinary income and the balance will be carried forward. When an investor has net capital losses, a maximum of $3,000 of those losses can be used to reduce ordinary income. Thereafter, the remaining balance can be carried forward for use in future years. (14145)

Answer 410

B. The yield-to-maturity is lower than its yield-to-call. When a bond is purchased at par value and callable at a premium, the yield-to-maturity is lower than its yield-to-call. (14142)

Answer 411

C. $25.55 The investor's adjusted cost basis for the stock is determined by starting with the total investment price, then adding any commissions or allowable expenses, and then dividing by the number of shares owned. In this case, the client invested $10,000 (400 shares x $25), but also paid a commission of $220. Therefore, the total investment equals $10,220. Then, the $10,220 is divided by 400 shares to determine the adjusted cost basis per share of $25.55. (24157)

Answer 412

D. Any appreciation or depreciation of the investment The total return calculation takes into account the cash flow from the investment (i.e., dividends and/or interest), plus any appreciation or depreciation in the value of the investment. This represents any unrealized gain or loss in the investment. (24204)

Answer 413

B. Nominal, current yield, yield-to-maturity, yield-to-call When callable bonds are trading at a discount, the order of yields (from lowest to highest) is nominal, current yield, yield-to-maturity, and then yield-to-call. (24248)

Answer 414

C. 4.1% A stock's current yield is found by dividing the annual dividend by the current market price. In this example, the annual dividend is $3.80. This must be divided by the current market price. The question states that the stock's price decreased by 7% from $100, thereby making the current market price $93. As a result, the stock's current yield is 4.1% ($3.80 divided by $93). Before the price decreased and the dividend was reduced, the current yield was 4% ($4 divided by $100). (84228)

Answer 415

B. $34 per share If a person inherits securities, the person's (beneficiary's) cost basis is the market value as of the date of the original owner's death. In this case, the beneficiary's cost basis is $34 per share. (14143)

Answer 416

Face Amount Certificate Companies, Unit Investment Trusts (UITs), and Management Companies (main one, Open End (mutual funds), and closed end.

Answer 417

Invesment Companies, Allows investors to acquire an interest in a large number securities, Mutual fund benefits include: Professional Management, Diversification, Liquidity, Convenience and cost, Exchanges at net asset value (NAV)

Answer 418

Professional Management, Diversification, Liquidity, Convenience and cost, Exchanges at net asset value (NAV)

Answer 419

75% of total assets must be specifically structured so that: No more than 5% is invested in any one company, and no more than 10% of a company's voting stock is owned. The other 25% may be invested in any manner. If the value of a position grows to above 5%, the mutual fund may still represent itself as diversified.

Answer 420

$25 million of the $100 can be invested in any manner. $75 Million will have to have no more than $5 million invested in any company and no more than 10% of a company's voting stock.

Answer 421

Prospectus

Answer 422

Prospectus

Answer 423

They issued by and redeemed back to the fund itself. They are not traded throughout the day.

Answer 424

Common Stock

Answer 425

Mutual Fund Company, XYZ Fund, Underwriter/Distributor/Sponsor, Dealer, investors (brokers)

Answer 426

Sales Load.

Answer 427

Bid or Redemption Price

Answer 428

Board of directors and shareholders (the persons who invest their money in the fund).

Answer 429

Investment Adviser

Answer 430

Transfer Agent

Answer 431

Custodian Bank, receives a fee for holding

Answer 432

Mutual Fund. They do NOT manage portfolio.

Answer 433

Shareholders

Answer 434

Board of Directors

Answer 435

Board of Directors

Answer 436

Objectives (whether they want growth or income or capital appreciation, etc). Investment Advisers are also referred to as the fund manager. They will also research and analyze financial and economic trends and decide which securities the fund should buy or sell in order to maximize performance.

Answer 437

The Management Fee, expressed as a percentage of assets (baed on AUM), not on performance.

Answer 438

Computes the net asset value, keeps track of share ownership; issues, redeems, and cancels the fund's shares, sends customer confirmations and fund distributions, receives a fee for its services

Answer 439

Maintains custody of the fund's total assets (i.e., provides safekeeping), responsible for both payable and receivable functions, receives a custodial fee for its services, and Does not manage the portfolio.

Answer 440

Often referred to as sponsor/wholesaler/distributors; they are appointed by the board, receives a portion of the sales charge for marketing and selling the fund shares to the public; may also receive a distribution fee, able to buy shares at the NAV and sell directly to investors or market the shares through independent dealers with whom its shares the sales charge (wholesaling).

Answer 441

The public or it may employ dealers such as a discount or full-service brokerage firm. Many funds use a network of dealers to market their funds to investors. Dealers are brokerage firms who have a written contract with the underwriter and are compensated for selling the fund shares to investors.

Answer 442

Invest in small companies and often participate in the initial public offerings of the companies' shares.

Answer 443

Always has an average maturity of 10 years. Causes a greater degree of interest rate risk.

Answer 444

current income and preservation of capital (advantage).

Answer 445

It is the accounting value of a fund's position; market-to-the-market at closing prices as of 4:00 pm ET. NAV is synonymous with the bid price or redemption (liquidation) price for mutual fund shares. Public offering price (POP) is the NAV plus any applicable sales charges, investors who purchase fund shares pay the next computed price. Has a forward pricing (no matter what time of day you buy a fund everyone will pay the same price of the NAV at 4 pm). How to calculate the NAV per share: (total assets - total liabilities) divided by number of shares outstanding.

Answer 446

POP (ask) - NAV (bid) divided by POP

Answer 447

Long, you do not day trade mutual funds (not short term investments)

Answer 448

8%, $10 - $9.20 divided by $10 = $.80 divided by $10 = 8%

Answer 449

Nav divided by (100 - sales charge %)

Answer 450

The Sales Charge is what you pay the broker (a built-in commission) and it is used to cover the various costs. Industry rules prohibit assessing charges in excess of 8.5% of the POP.

Answer 451

Front-end loads (total investment, less the sales charges, is directed to the portfolio), Back-end loads (contingent differed sales charges)(Assess at the time an investor redeems, Percentage decreases as the holding period lengthens (the CDSC, contingent differed sales charges, ), 12b-1 fees (Under the investment company act of 1940)

Answer 452

Established under the investment company act of 1940), An annual fee levied against the fund's assets: Allows distributions costs to be borne by the fund, rather than from front-end charges; Used to finance the promotion, advertising, commissions (includes continuing commissions or "trailers", if written contract exists, it may be paid to RRs who are still employed with a firm or to retiring RRs based on existing assets.

Answer 453

1. When the portfolio manager buys and sells shares they earn commissions and 2. When individuals buy fund shares that is covered under 12b-1

Answer 454

12b-1 fees.

Answer 455

No front-end sales charge (load), no deferred sales charge (back-end load), no 12b-1 fee that exceeds .25% (25 basis points) of the fund's average net assets per year. A no-load fund may have a redemption fee (since the fee is not considered a sales charge)

Answer 456

Sales Charges, Fees may be based on a percentage of AUM or on amounts redeemed early from a fund: Management advisory fee, Administrative fee, and redemption fee.

Answer 457

dividing a fund's expenses by its average net assets (sales charges are not expenses), The mutual fund expense ratio is defined as the percentage of a fund's assets paid for operating expenses and management fees, including 12b-1 and administrative fees, and all other asset-based costs incurred by the fund.

Answer 458

A, B, and C shares

Answer 459

Front-end loads (sales charge), Low or none (12b-1 fee), and breakpoints available for large purchases (other features)

Answer 460

A shares, since they can qualify for breakpoints.

Answer 461

Contingent deferred sales charge assessed if shares are held for less than 6 to 8 years (sales charge), Higher than Class A shares (12b-1 fees), often convert to Class A shares after 6 to 8 years; no breakpoint available (other features)

Answer 462

A level load (ongoing fee of typically 1%) for as long as shares are held. Back-end load may be assessed for early redemption (sales charges), High than class A shares; generally the same as class B shares (12b-1 fees), No conversion to Class A shares (other features)

Answer 463

Quantity discounts. Mutual funds offer sales breakpoints on shares that are purchase with front-end load. Breakpoints are dollar levels at which the sales charge is reduced (the mutual fund industry's version of a volume discount). A fund's breakpoint must be clearly stated in its prospectus.

Answer 464

Breakpoints, letter of intent (LOI), Rights of Accumulation (ROA), Dollar Cost Averaging (DCA), or Fund Families (or fund complexes) is a term used when defining a single investment company or mutual fund company that has many different types of mutual funds from which a customer may choose to purchase. A "fund family" is a brand name that applies to several related individual mutual funds.

Answer 465

Purchase of A shares.

Answer 466

Sales charge would be 4.50%; NAV is $19.61; (NAV/100%-sales charge%): $19.61/100%-4.50%; $19.61/95.50%; Resulting POP: $20.52 $60,000/ $20.52 = 2,922.55 shares is the answer (mutual funds allow the purchase of fractional shares)

Answer 467

Breakpoint. Without initially depositing the entire amount required. LOIs are 13-month time periods. May be back dated 90 days (if backdated, the fund will re-compute the sales charges on previous purchases. LOIs are non-bonding on customer; a portion of shares held in escrow in case of non-performance.

Answer 468

They can take advantage of an LOI. The investor would qualify for 3.5% sales charge. If they do not bring in the extra $20k within 13 months of the LOI the company will hold a portion of shares in escrow in case of non-performance (1% difference of shares between the sales charge percentage, $50k but less than $100k (at a 4.5% sales charge) compared to $100k, but less than $250k (at a 3.5%). They will hold off this 1% difference in shares in escrow.

Answer 469

It is a discount for Sales Charges when buying Class A shares. It is a right to add up all purchases made from same family of funds (when a breakpoint is crossed, current and future purchases will have a lower sales charge).

Answer 470

Ways to receive discounts on sales charges for mutual funds. They are available to: an individual purchaser, a purchaser's immediate family member (i.e., spouse, dependent children), a fiduciary for a single fiduciary account, a trustee for a single trust account, pension and profit-sharing plans that qualify under the internal revenue code guidelines, other groups (e.g., investment clubs) provided they were not formed solely for the purpose of paying reduced sales charges

Answer 471

3.5%, now the value of fund would be $110k (qualifying for the 3.5% since the value is more than $100k and less than $250k)

Answer 472

A method of investing which involves making the same periodic investment regardless of share pice over a fixed period. A method of reducing sales charge. DCA lessens the risk of investing a significant amount of money at the wrong time and is especially appropriate for long-term investors, such as those investing for retirement. DCA does not guarantee attainment of any specific investment goals. Necessary disclosures for (DCA): No assurance of long-term growth, Prices are subject to change, Contributions must continue even when prices decline, otherwise losses could occur.

Answer 473

Within 7 calendar days of the receiving the redemption notice.

Answer 474

A mutual fund investor may redeem (sell) shares and receive the share's next calculated net asset value (NAV) (minus any applicable contingent deferred sales charges or redemption fees). Funds are required to send investors the payment for their shares within 7 calendar days of receiving the redemption notice.

Answer 475

They are assessed against investors who redeem their shares after holding them for a SHORT period (often one year or less); NOT a sales charge; it is returned to the fund's portfolio.

Answer 476

Withdrawal plans. A minium account value is required; a variety of withdrawal methods are available, such as: fixed dollar amount, fixed percentage, fixed time, and fixed number of shares. Payments are NOT guaranteed for the life of the investor. Clients should not be advised to engage in a systematic purchase and withdrawal plan simultaneously.

Answer 477

Breakpoint sales: Soliciting sales of shares at amounts just below a breakpoint, recommending purchases from different mutual fund families due to the potential for higher sales charges, switching between different fund families due to the impact of new sales charges or holding periods (for switch recommendations, RRs may be responsible for justification of: tax ramifications (both exchanges and switches are taxable), potential sales charges on new purchases; Excessive purchases of Class B shares (salespersons should not recommend purchasing large quantities of B shares (since they do not qualify for breakpoints))

Answer 478

Registered Representative

Answer 479

Could have tax ramifications (both exchanges and switches). This is a breakpoint sales violation.

Answer 480

Investment company, Issues debt certificates (the issuer promises face value at maturity or surrender value if presented prior to maturity).

Answer 481

Investment Company, It is supervised, NOT MANAGED (no management fee); Portfolio generally remains fixed for the life of the trust; Ownership usually referred to as shares of beneficial interest (SBI)

Answer 482

Publicly traded, They are typically a one-time issuance of common shares: could issue preferred stock or bonds. Shares may trade at a discount or premium to NAV with commission or mark-up added (supply and demand) Sponsor does not stand ready to redeem shares Shares trade in the secondary market Shares may be sold short.

Answer 483

Closed-end fund

Answer 484

They continually issue new shares (common shares and sold by prospectus); Shares are sold at the NAV + sales charge (if any); Sponsor stands ready to redeem shares at the next calculated NAV (forward pricing); shares remain in the primary market; shares cannot be sold short.

Answer 485

B. Domestic aggressive growth fund Funds that invest in foreign securities, either stocks or bonds, have exchange-rate or currency risk. This is the risk that the value of income or gains from the security will be adversely affected by changes in the value of the foreign currency. Funds that invest only in domestic (U.S.) securities don't carry this risk for U.S. investors. (14162)

Answer 486

A. High growth potential A sector fund invests in a chosen industry or field, and is only diversified within that specific sector. These funds are also referred to as specialized funds and are generally more risky than other funds, thereby offering greater growth potential. (24253)

Answer 487

D Low portfolio turnover and relatively few taxable events Index funds mimic the index they're tracking and tend to make very few changes in the portfolio. As a result of this low turnover, there are few taxable events associated with an index fund. (14163)

Answer 488

A. 4% The formula for calculating the sales charge is (POP - NAV) ÷ POP. For this fund, the sales charge is 4% (i.e., $13.75 - $13.20) ÷ $13.75. (14155)

Answer 489

C. 90 days A letter of intent (LOI) allows an investor to reach a breakpoint without initially investing the entire amount. The LOI covers a period of 13 months, but is able to be backdated for 90 days. (14173)

Answer 490

D. 100% minus the 6% sales charge A mutual fund's asked price or public offering price (POP) is calculated by dividing the NAV by 100% minus the sales charge percentage (i.e., POP = NAV ÷ [100% - Sales Charge %]). In this question, the POP is $34.57 ($32.50 ÷ 94%). (14168)

Answer 491

C. The POP at close of the next business day. Mutual fund share purchases and redemptions are forward priced, which means that the price is based on the next computed NAV at the close of business. For orders that are placed before 4:00 p.m. ET, the price is based on that day's close. However, since the purchase in this question was placed after 4:00 p.m. ET, the price will be the POP as calculated at the close of the next business day. (14167)

Answer 492

B. Adviser The principal underwriter for a mutual fund may be referred to as the sponsor, wholesaler, or distributor. The investment adviser is the entity that makes investment decisions for the fund based on the fund's investment objectives and policies. (24289)

Answer 493

B. Redemption fee When mutual fund shares are redeemed, some funds deduct a small redemption fee from the amount that’s paid to the investor. This fee is returned to the fund’s portfolio and is not considered compensation to a salesperson. The purpose of the fee is to discourage investors from redeeming their shares too quickly. (14153)

Answer 494

C. Value funds A value fund invests in stocks that appear to be bargains. These include companies that have good fundamentals, but may be in sectors that are currently out of favor with the market. (14164)

Answer 495

D. Asset allocation fund An asset allocation fund invests its portfolio among a variety of investment classes, such as equities, bonds, and cash (money-market investments). The fund manager may change the allocation based on computer modeling techniques and forecasts of economic changes. (10622) (14165)

Answer 496

C. Hold securities portfolios which are not actively managed, but remain fixed for the life of the trust Unit investment trusts (UITs) hold securities portfolios which are not actively managed or traded and remain fixed for the life of the trust. Typically, there's an expiration date and, on this date, the UIT is liquidated and the funds are distributed to the investors. (24279)

Answer 497

B. It continually offers new shares. Closed-end funds are a type of investment company (a subset of management company) that offer a fixed number of shares to investors. After the initial offering, shares of the closed-end fund then trade on an exchange and this serves as the vehicle for investors to buy and sell their positions. Unlike mutual funds (open-end management companies), only full shares may be purchased or sold. Investors who want to either buy or sell shares may do so in the open market. This is different from mutual funds shares which are never traded in the secondary market. Instead, mutual fund shares are redeemed back to the fund. (24266)

Answer 498

D. Fees and Expenses Every mutual fund prospectus must contain a section which describes the fees and expenses. This section must include certain standard items, including shareholder fees (e.g., sales loads), annual fund operating expenses (including 12b-1 fees), and a table that shows the total cost of owning the fund over one-, three-, five-, and 10-year periods (based on a 5% return assumption). Since the information will be presented in a standard format, investors can easily compare this information between funds. (14158)

Answer 499

A. Expense ratio A mutual fund's expense ratio measures the amount of expense that a mutual fund charges its shareholders each year for operating the fund. The expense is expressed as a percentage of a fund's assets and is considered the best indication as to how a fund manages its expenses. (24277)

Answer 500

D. Decision-making authority over what's included in the fund's investment portfolio Investment companies offer the advantage of professional supervision of the fund portfolio. However, the shareholders don't exercise control over the investment portfolio. Instead, this is left to full-time professional fund managers. Investment companies seek to obtain appropriate diversification of securities in the fund portfolio while, at all times, attempting to meet the fund's objectives. The ability to easily redeem fund shares back to the fund is another fundamental advantage. (14157)

Answer 501

C. Must be sent by the fund to any interested party who requests it A mutual fund's statement of additional information (SAI) contains information that mutual fund investors will likely find useful. However, the SAI information is more technical and not considered as important as that which is found in the fund's prospectus. The SAI provides some of the following information: Additional disclosure on securities, risks, and policies The fund's audited financial statements The fund's portfolio of securities as of the date of the SAI Information regarding any person that owns 5% or more of the fund's shares The SAI is filed with the SEC as part of the fund's registration statement. Thereafter, a mutual fund is only required to send an SAI to any person who requests one; it's not specifically required to freely distribute it. (85272)

Answer 502

Closed-end funds and UIT (redeemable). Closed-end's portfolio is adjustable and it is marginable. UIT's portfolio is fixed and not marginable.

Answer 503

Annuities are products that are sponsored by insurance companies in which investment income grows tax-deferred; they may be fixed or variable.

Answer 504

Securities. Fixed are not.

Answer 505

Accompanied by the insurance company. You provide money to the insurance company for a fixed annuity and they guarantee you a payout at some point in the future. Fixed annuities is NOT a security

Answer 506

Annuitant.

Answer 507

In a "general account"

Answer 508

Separate account, the annuity money is kept in a different account from the rest of the funds in a general account.

Answer 509

Safe, secure, and predictable investments

Answer 510

Sub-accounts that meet investor objectives

Answer 511

Poor, they are not a good inflation hedge because they guarantee a fixed payout.

Answer 512

Superior to fixed. It is because variable annuities are securities they can offer an overall better return than fixed.

Answer 513

An investment company product (Regulated under the investment company act of 1940, Registered with the SEC); Must be sold by prospectus; investments may be changed during accumulation phase.

Answer 514

"Accumulation phase," Also referred to as the "Pay-in Period" or "Deposit Phase." During this phase, account is valued in terms of "accumulation units." The purchase price is referred to as the accumulation unit value (AUV); similar to a mutual funds's NAV (Unit value is calculated at the end of the business day (using forward pricing that's similar to mutual funds). Accumulation units are invested in separate accounts. You signed a contract for a length of term for a variable annuity.

Answer 515

Accumulation Units. Typically purchased with after tax dollars. Annuities are tax deferred (when the investment income is withdrawn) and NOT tax free.

Answer 516

Subaccounts, they can have several. Here are a few examples: S&P 500 Index subaccount Value Subaccount Aggressive Growth Subaccount International Subaccount Biotech Subaccount Global Subaccount High-yield Corporate Bond Subaccount GNMA Subaccount Special Situations Subaccount

Answer 517

Annuitants may choose to take withdrawals from their annuity (annuitants control the timing and amount of their withdrawals; earnings are withdrawn first and taxable) Premature withdrawals (withdrawals of earning prior to age 59.5 are subject to a 10% penalty, the gross amount is also added to taxable income).

Answer 518

Only $10k of the $20k. Since the other $10k will be a return of capital (meaning return of the after tax monies put into the account).

Answer 519

Mortality clause of a variable annuity with be paid out to the beneficiary for the greater of: The total contributions made OR The current value of the contract

Answer 520

$75k. It is the greater of the total contributions made or the current value of the contract.

Answer 521

The beneficiary will receive $110k, It is the greater of the total contributions made or the current value of the contract. However, the amount above cost basis could be taxable.

Answer 522

I. Accumulation units are purchased after-tax and grow tax-deferred. AND III. Death benefits are the greater of cost basis or the current value.

Answer 523

The Annuity Phase, Also referred to as "payout", "withdrawal," or "Annuitization Phase." When receiving benefits at annuitization, accumulation units are converted into a fixed number of annuity units Unit value is based on: Age and gender of the contract holder Life expectancy Payout option selected Value of the separate account Payout is established by multiplying the fixed number of annuity units by the fluctuating value

Answer 524

Straight life annuity: Greatest risk, but the highest payout. The annuitant receives a payout for their entire life time Life Annuity with Period Certain: Payments are made to annuitant for life or to beneficiary (in the case of annuitant's deather) for specified minimum number of years. Joint and Last Survivor Annuity: For life, so long as one annuitant is living. Unit Refund Life Annuity: Annuitant receives an amount at least equal to his original investment (at death, any remaining amount is paid to a beneficiary)

Answer 525

They will receive payment for the remaining 3 years.

Answer 526

For life, so long as one annuitant is living.

Answer 527

Annuitant receives an amount at least equal to his original investment (at death, any remaining amount is paid to a beneficiary)

Answer 528

Like mutual funds, annuities have charges and expenses that are not invested in the separate account, including (must be disclosed prior to the or at the sale): Sales charges - there is no maximum; they must be fair and reasonable. Expenses - insurance companies deduct various expenses from the investment income, such as: 1. Management fee - advisers's fee for making investment decisions in the separate account 2. Expense risk charges - charged if expenses are greater than estimated 3. Administrative expenses - cost of issuing and servicing contracts 4. Mortality Risk Charges - a guarantee that annuitants will be paid for life even if they live beyond life expectancies.

Answer 529

Qualified (special tax treatment), Annuities: Offered to employees of tax-exempt organizations or public schools (403b plan) Deductible (pre-tax) contributions, which results in a zero-cost basis Contribution amount is limited (limit can change each year) Non-qualified annuity: Available to any person through either an insurance company or broker-dealer Non-deductible (after-tax) contributions, which establishes the basis Contribution amount is NOT limited *State and local government offer their employees 457 plans, which have qualified features.

Answer 530

Surrender. You can also withdraw a partial amount of the annuity value at any time and this called a "partial surrender." Annuitants may be required to pay a surrender charge. and pay taxes on any increase earned in the annuity.

Answer 531

Contribution: $10k Earnings: $6k Basis: $0 (money you put in would be deducted from your taxes) Taxable: $16k (any time the IRS allows you to have a tax-deferred growth, you will be taxed at the highest rate the government has as if it is ordinary income)

Answer 532

Contribution: $10k Earnings: $6k Basis: $10k (money you put in would be deducted from your taxes) Taxable: $6k

Answer 533

EIAs are similar to: Fixed annuities since they offer a guaranteed minimum return Variable annuities since they offer returns which vary (based on index performance) Investor's return: If the index performs poorly, the invest will still earn the minimum guaranteed rate If the index performs above a preset level, the investor will earn a return that exceeds the minimum guaranteed rate: (some contracts are issued with a "participation rate" which limits the amount of the index's appreciation that the client will earn).

Answer 534

Target Audience: Generally for investors within the age range of 30 to 55 Persons seeking tax-deferred growth or to offset inflation Person who have maximized qualified plan contributions (401k, 403B, 457, etc). Unsuitable for: These are not liquid securities Senior citizens or persons who are seeking immediate tax benefits Investors with short investment time horizons Concerns with 1035 exchanges: Customer must benefit from the new annuity Any benefits potentially lost in the exchange Whether RR recommending the exchange has signed off and the application was approved by principal example: Someone (age 30) puts in money in a 10 yr annuity in 4 years the RR says "they have a better product for you." Regulators are worried about the upfront sales charge. If the annuitant decides to move forward they have to do what is beneficial for the client and not the RR. The client has to benefit.

Answer 535

Regulatory name for 529s. They are created by states which is why they are considered a municipal product. Local Government Investment Pools (LGIPs) Created by state and local governments to provide municipal entities a place to invest funds Government entities purchase interest in the trust (LGIP) Provides safety and diversification Not open to the public Prepaid Tuition Plans A type of college savings plan Purchaser buys college tuition credits (locks in tuition costs at current levels and protects against future cost increases) Not self-directed 529 plans Primarily a type of college savings plan Account owner chooses a plan, but may alter the investment direction *side note 529 plans and municipal fund securities could be discussed interchangeable on the exam.

Answer 536

529s are funded with after-tax dollars; investment grows tax-deferred (and could be tax free if used for qualified educational purchases) Money invested in one state's plan may be used in another state. To avoid gift tax, the maximum contribution is $18k per person, per year (doubled for married couples) The plan allows for front-loading five years of contributions ($90k per person or $180k for married couples) A federal tax exemption is provided to the beneficiary for qualified withdrawals: College tuition, books and supplies, room and board, a maximum withdrawal of $10k per year for tuition and books for grades k-12, and up to $10k (lifetime limit) to repay a qualified student loan or expenses related to certain apprenticeship programs (the donor could also be the beneficiary but you need to be at least 18 years old.

Answer 537

529 plans may be direct-sold or adviser sold: Direct-sold: Involves no salespersons; instead, the plan is sold directly through the 529 savings plan's website or through the mail Adviser-sold: The plan is sold through a broker-dealer that has entered into a selling agreement with the primary distributor of the 529 plan 529 ABLE (529A) Plans (achieving a better life experience) Available to individual who are disabled (must have been disabled prior to age 26) and are receiving Social Security disability, Medicaid, or private insurance payments (529 ABLE plans do not impact them from continue receiving their payments): Maximum Contribution is $18k per year (no front-loading) Disability payments continue if account value doesn't exceed $100,000 Distributions are tax-free if used to pay qualified expenses

Answer 538

529 ABLE plan. They have until age 26 to be deemed disabled to use a 529 ABLE plan.

Answer 539

After-tax contributions in a 529 were a $100k. It earned $300k of tax-deferred earnings. For qualified distributions, the entire balance is distributed tax-free

Answer 540

D. Seven business days After receiving a completed application and a check for the purchase of a variable annuity, a broker-dealer has up to seven business days to determine whether the purchase is suitable for the customer. (24327)

Answer 541

A. Immediate tax deductions When purchasing a variable annuity, an individual should understand that the contribution is made after-tax and doesn't provide for a deduction. Variable annuities do offer tax-deferred growth and serve as a hedge against inflation. An individual can also make a tax-free exchange to another variable annuity through a 1035 Exchange. (14185)

Answer 542

D. A surrender charge and a tax on any increase in the value of the annuity Investors who take partial withdrawals from a variable annuity may be subject to a surrender charge (CDSC) based on how long the annuity was held. In addition, earnings on the annuity are withdrawn first which results in tax liability. Earnings generated in an annuity are taxed as ordinary income, not as a capital gain. (14177)

Answer 543

B. Paying taxes on the exchange to the new annuity The IRS allows a 1035 Exchange of one annuity for another without creating a taxable event. However, the exchange may result in a surrender charge on the original annuity, a new surrender period on the new annuity, and the loss of existing benefits on the original annuity. (24320)

Answer 544

B. The number of annuity units remains the same over time. Once annuitized, the number of annuity units remains the same. The value of each payment will change based on a fluctuating value of the annuity unit. (14179)

Answer 545

A. a loan can be taken during the accumulation or annuity period. Loans are only permitted during the accumulation period. In addition, the advantages of loans include the potential of avoiding surrender charges, taxes, and early distribution penalties. (14178)

Answer 546

C. Contingent deferred sales charge Variable annuities assess a sales charge at the time of redemption, which is also referred to as a surrender or withdrawal charge. These charges are also considered a form of contingent deferred sales charge (CDSC) since the charges typically diminish the longer the person holds the annuity. (24319)

Answer 547

Limiited Partnerships

Answer 548

Exchange-Traded Fund (ETF): Portfolio consists of a basket of securities which mirror an index (low expenses) Example: S&P 500 ETF Shares trade in the secondary market; may be sold short Commission is paid on the trade Intra-day pricing (as the day goes on the ETF can be a different price throughout the day) Leverage and inverse ETFs exist Could be held for short/long period of time. Not taxed themselves Not taxed themselves; investors who buy them will receive distributions which can be taxable passively managed and traded on an exchange Index Fund: Portfolio consists of a basked of securities which mirror an index (low expenses) Example: S&P 500 Index Fund Shares are redeemed by the fund; cannot be sold short. Usually have no sales load (no-load fund), Big brokerage firms sell index funds Forward priced; once daily Do not allow leverage hold for a long period of time Not taxed themselves; investors who buy them will receive distributions which can be taxable

Answer 549

Inverse ETF: Designed to perform in a manner that is inverse to the index it is tracking If the index falls by 2% on the day, the ETF should rise by approximately 2% Similar to short selling without unlimited risk (the most you could lose is what you invest) Leveraged ETF: Constructed to deliver 2x or 3x the index it is tracking May be leveraged inverse ETF If the index rises by 1.5%, a 2x long ETF should rise approximately 3% The portfolios reset daily and, as a result, are designed for short-term trading; they take advantage of intraday swings in the index

Answer 550

Structured products and are issued as "unsecured debt" (like unsecured bonds). They trade on exchanges, have low fees, and provide access to challenging areas of the market. They are based on some type of market movement. Gold, silver, etc. (variety of different ETNs). They do not own securities it is unsecured debt. ETN is linked to performance of a market index or other benchmark They are backed only by the full faith and credit of the issuer, typically the broker-dealer. (credit risk) The note could get down graded. The business could go bankrupt (a lot of risk) Not principal protected, but return is linked to performance of an asset. May be purchased on margin, sold short, and traded on exchange Issuer obligated to deliver performance You can have leverage and inverse ETNs

Answer 551

Hedge Funds: Investment fund generally for wealthy investors Not considered a registered investment company Uses exotic strategies involving derivatives, leverage, and selling short May place restrictions on investors withdrawing money (lack of liquidity) Not required to publish NAV on a daily basis Not liquid and high fees Private Equity and Venture Capital Funds: Similar to hedge funds in the method of raising capital through the sale of limited partnerhip units under the Regulation D exemption Typically available to accredited investors only Unregulated; limited trading opportunities Long term positions They do not have a daily quote

Answer 552

A company that manages a portfolio of real estate investments in order to earn profits for its shareholders: Types of REITS: Mortgage/debt: issued secured loans that are backed by real estate purchases Equity: own and operate income-producing real estate (#1 most popular item in REIT) Hybrid: Combination of mortgage and equity REITs Tax Benefits of a REIT: No taxation on income if 90% of it is distributed Doesn't pass through losses (unlike limited partnerships) 20% of distributed income is tax-deductible (every dollar can have 20% of tax-deduction) Characteristics: Subject to registration requirements of the securities act of 1933 Shares trade in the secondary market and are marginable Distributions don't qualify for the dividend exclusion rule Attractive for investors seeking current income.

Answer 553

REIT is typically publically traded on NYSE Registered, exchange-listed, and publicly traded (liquid) Registered, but not exchange-list (non-traded) often have a lack of liquity Unregistered; offered through a private placement (illiquid)

Answer 554

A limited partnership is a business venture that's designed to pass through both "income and losses" to investors. Flow-through of income (no double taxation) and expenses: Income flows through as passive income A portion is taxed as ordinary income (20% is deductible) Limited liability: Limited partners are only liable for the amount invested and any loans assumed (i.e., the amount they have at risk)

Answer 555

Illiquidity: not publicly traded General partner's approval may be required to sell Lack of Control: Limited partners have limited voting power and no managerial authority Effects of Tax Law Changes Increased Tax Complexity (k1, similar to a 1099) Great risk is tax law change, you should not invest solely on tax reasons Calles to contribute additional funds

Answer 556

General Partner: Day-to-day manager with unlimited personal liability Must at least 1% interest Fiduciary toward limited partner Last at liquidation: Secured lender General Creditor Limited General (last) Limited Partner: Passive investor with limited liability Contributors of capital Have certain rights: Lend money to partnerships, inspect books, and compete Ways to endanger "limited" status" Negotiate contracts, hire/fire employees, or lend name When can a limited partner be in 2 categories: When they lend money to the limited partnership, they will now also be a general creditor.

Answer 557

Public Offering: If a sponsor (GP) conducts a public offering of securities: Registration is required under the Securities Act of 1933 An underwriter is used to facilitate the offering A prospectus is used as the disclosure document Private placement: If a sponsor (GP) conducts a private placement of securities: Securities qualify for an exemption from registration through Reg. D.

Answer 558

Categories: Raw Land: Speculation on land appreciation; no positive cash flow or depreciation New Construction: Risks of overbuilding, cost overruns, long duration, etc. Existing: Existing cash flow, but potential problematic tenant issues (e.g., long-term leases) Low Income (Government Assisted): Beneficial potential tax credits; little chance of appreciation; high maintenance Riskiest to least riskiest: Raw land New construction Existing Low-income

Answer 559

Categories: Exploratory: High risk with high potential reward (Highest risk) Developmental: Drilling near an existing field (risk is less than balanced) Balanced: Combination of exploratory and developmental (risk is less than exploratory) Income: Purchase of existing wells: creates immediate cash flow (lowest rist Depreciation,

Answer 560

Investors should be aware of the following risks of DPP investments: Management ability of the general partner(s) Illiquid nature and potential loss of capital Unpredictable income Potential future mandatory assessments rising operating costs Changes in tax laws and government regulations Economic and enviromental occurrences Successful investing is about managing risk, not avoiding it.

Answer 561

Investor certification: Registered representatives are required to certify they have informed their customers of all relevant facts and lack of marketability (lack of liquidity) Investors must have sufficient net worth and income to absorb a loss of the entire investment Discretionary accounts: Registered Representatives are not permitted to exercise discretion involving client investments in DPPs.

Answer 562

D. Subchapter C corporation C corporations are taxable entities that are owned by shareholders. General partnerships, LLCs, and subchapter S corporations pass through income and losses to their owners and are not taxable entities. (14197)

Answer 563

C. Hedge funds Exchange-traded funds (ETFs), exchange-traded notes (ETNs), and real estate investment trusts (REITs) can all be purchased in the secondary market. However, hedge funds (similar to mutual fund shares, cannot be purchased in the secondary market. (24381)

Answer 564

B. Equity REITs Equity REITs invest in properties and distribute the income that's generated to the shareholders. (14194)

Answer 565

A. ETNs are secured by the assets they track. ETNs are considered unsecured securities since the issuer doesn't hold the assets that are being tracked. They're subject to the creditworthiness of the issuer, can be linked to nearly any index or asset, and don't make regular interest payments. (14192)

Answer 566

B. A private investment fund that's designed for wealthy, sophisticated investors Hedge funds are private investment pools that are designed for wealthy, sophisticated investors. Accredited investors include wealthy, sophisticated individuals; however, hedge funds are not mutual funds. (84416)

Answer 567

C. Wildcat drilling (exploratory) Wildcat drilling, also referred to as exploratory, involves drilling in unproven areas and therefore presents the greatest risk of failure. A developmental program involves drilling in areas that have proven to be successful. New construction and raw land are both types of real estate programs. Although raw land is considered the most risky real estate program, the consistent need for property results in less risk than the unsuccessful drilling of wells. (24343)

Answer 568

B. A registered representative must certify that the customer has been informed of all relevant facts regarding the investment. Registered representatives (RRs) must certify that their customers have been informed of all relevant facts concerning the partnership. Due to the complexity of the programs, RRs cannot exercise discretion when purchasing an interest in a partnership for a customer. Typically, investors must satisfy net worth and income requirements to invest and should understand the management is handled by the general partner. (14201)

Answer 569

D. ETFs are redeemed at their net asset value. Exchange-traded funds trade on exchanges at prices that are determined by supply and demand. Purchases and sales are executed at the market price plus or minus a commission. (14189)

Answer 570

An option is a contract between two parties. Someone to sell that option and someone to sell that option, seller or writer. Owner of the option (buyer) or long the option. The owner will pay the premium. It acquires a right/control of that option. It is a right to do something to an underlying security The writer (or seller) a.k.a. short the option. Receives the premium. They assume an obligation to do something.

Answer 571

Call and Puts For a call a buyer has a right to "buy stock." Seller's obligation for a call is to "sell stock." For a put a buyer has a right to sell the stock. The Seller's obligation to buy stock. The seller received a premium to take on that obligation. Seller's of puts are bullish (want the underlying asset to rise).

Answer 572

Buyer can sell it for $50. (buyer would hope for a bearish market).

Answer 573

Bullish, (wants the underlying asset to rise)

Answer 574

Bearish, (wants the underlying asset to fall)

Answer 575

Bearish, (they want the underlying asset to fall)

Answer 576

Bullish, (they want the underlying asset to rise)

Answer 577

Contract. This is also the definition of Standardized Components: The name of the underlying security The expiration month of the contract The exercise (or strike) price The type of option

Answer 578

What type of option: a call option to buy (gives them the right to buy the stock. What stock do they have the right to buy? ABC stock How many shares of ABC stock can you buy? 100 shares, each contract represents 100 shares of each option. What price can you buy it? $50/ share (strike price) How much would you pay the total contract price? $50/ share X 100 shares = $5,000 (aggregate contract, the total contract price) How long do you have this right for? June, Third Friday in June is the expiration date. Whatever month listed it is always the third Friday. What did you pay to call away? A premium of $5/ share (5 points). 100 shares x $5 = $500 (total aggregate premium). Paid $500 What did we do? We paid $500 for the right to call away or to buy a 100 shares of ABC at $50 a share until the 3rd Friday in June. What if the stock goes to $0? The buyer can choose not to exercise their right. They would lose out the $500 paid for the call option, but you do not have to act on the stock.

Answer 579

Calls are "in-the-money" if the market price is above the strike price (for example if the market price is at $70). A call convey's right to buy. You want to buy the stock at $60 if the stock's market price is up. Calls are "out-of-the-money" if the market price is below the strike price. For example if the market price is $50. Puts are "in-the-money" if the market price is below the stirke price. For example if the market price is $50. It conveys the right for whoever bought to sell the stock at $60, but you can buy it at $50. It is in the money by 10 points. Puts are "out-of-the-money" if the market price is above the strike price. For example if the market price is $70. Nobody would want to sell it at $70. Calls are in the money if the market price is up and Puts are in the money with the market price is down. (Call up and Put Down). Calls and Puts are "at-the-money" if the stock's market price is the same as the strike price of the option.

Answer 580

Calls are in the money if the market price is up and Puts are in the money with the market price is down.

Answer 581

Premium = Intrinsic Value + Time Value Intrinsic Value is the amount by which an option is in-the-money. If it is in the money then it has intrinsic value. (The Premium is higher than the intrinsic value). Time Value is the portion of an option's premium that exceeds its intrinsic value. (Premium - the intrinisc value = the time value) A contract has intrinsic value if it is in-the-money. Its intrinsic value equals its in-the-money amount. It has zero intrinsic value if it is out-of-the-money or at-the-money. In this case the premium would be the time value Time Value is based on: Time left until expiration. (Maximum life of equity options is 9 months. LEAPs are longer options that has maximum of 39 months.) Market volatility The premium is based on the market (supply and demand). What someone is willing to buy the option for and what someone is willing to sell the option for. If you were willing to buyABCJuly50call and you look at the stock price now and it is $60 it has an intrinsic value of $10. If you were willing to buyABCJuly50call and you look at the stock price now and it is $45 it has no intrinsic value. It is 5 points out of the money. If you were willing to buyABCJuly50call and you look at the stock price now and it is right at $50. What is the value? It is at the money. You look at how much time is left until expiration. If there is 5 months left it gives it an option to raise. You would also weigh how the market volatility The concept of INtrinsic value is tied to options that are IN-the-money

Answer 582

Buyer, owner, long: - Rights: buy stock at strike price - Obligations: none - Strategy: Bullish (up) - Breakeven: strike price + premium - Maximum Gain: Unlimited - Maximum Loss: Premium Seller, writer, short: - Rights: none - Obligations: sell stock at strike price (could create risk is the stock price goes up (bullish). - Strategy: Bearish (down) - Breakeven: Strike price + premium - Maximum Gain: Premium - Maximum Loss: Unlimited Creating a basic option premium is considered speculative. Only good for people who want to take on risk and speculate on money potential.

Answer 583

We paid $300 for the right to call away the buy 100 shares of XYZ at $45 a share up to 3rd Friday in February. The option is in-the-money by 2 points (47-45). We paid an extra point in time value. Breakeven for calls is the strike price + premium. 45+3=48. Debited money (cash out for this transaction) $3.00 which you paid for premium + $45.00 per share. You would need to sell the stock at $48 a share to breakeven.

Answer 584

We were paid $250 for the right to call away to sell 100 shares of XYZ at $47.50 a share up to 3rd Friday in February. Breakeven is $47.50 ($45+$2.50) Credit for the transaction (cash in) $2.50 $45.00 $47.50 total. We took on this obligation because someone paid us $250 to take on the obligation.

Answer 585

Buyer, owner, long: - Rights: sell stock at strike price - Obligations: none - Strategy: Bearish (up) - Breakeven: strike price - premium - Maximum Gain: (strike price - premium) x 100 shares - Maximum Loss: Premium Seller, writer, short: - Rights: none - Obligations: buy stock at strike price. - Strategy: Bullish (up) - Breakeven: Strike price - premium - Maximum Gain: Premium - Maximum Loss: (strike price - premium) x 100 shares Creating a basic option position is considered speculative.

Answer 586

Speculation means you are using in an attempt to make money. (High Risk) Options can be purchased or sold to generate a profit The investor has no existing position in the underlying security Long Calls and Short Puts are bullish Long Puts and Shorts Calls are bearish Hedging means you can reduce risk. Purchasing options to protect the movement of an underlying security from an adverse market move Long puts protect a long stock position. If you bought stock at 50 and you bought a $50 put, if the market went down you can still sell the stock at $50. It locks in a selling price. The disadvantage is you pay the premium for the protection (think of insurance). Long calls protect short stock options. You short a stock at $50 you hope it falls. You can buy a call if the market raises. It will allow you to call the stock away at a locked in price. Example you could buy it back at $55 (think of insurance). You pay a premium as a disadvantage.

Answer 587

1. It could "Expire Worthless:" -if an option is at- or out-of-the-money on the expiration date, the holder of the contract has no incentive to exercise the contract. The contract expires worthless. The expiration triggers: - The maximum profit for a seller of a call or put - The maximum loss for the buyer of a call or put 2. It could be "exercised:" - The investor who is long an option has the exclusive right to exercise that option at his own discretion. The two styles of exercise are: - American Style - options may be exercised at any time up until expiration. The equity options that trade on US exchanges are American Style -European style - options may only be exercised on the day of expiration. Quite a fex index options are European style. Also Foreign currency options are european style 3. It could be "liquidated:" - Liquidating (closing out) an option position is essentially an alternative to exercising the option. The investor executes an opposite transaction on the same series of option. In other words, what was bought is sold or what was sold is bought.

Answer 588

Opening Transaction: Opening purchase (long/buyer) or Opening Sale (short/seller) Closing transaction: Closing sale opposite opening pruchase Closing purchase opposite of closing purchase Note: Profit or loss is determined by the difference between the price paid for option and price received from sale.

Answer 589

The options clearing corporation: - Issues and guarantees listed option contracts. Becomes the guarantor. - Eliminates counterparty risk by acting as the third party in all option transactions. - Acts as the buyer for all sellers and the seller for all buyers - Deals directly with broker-dealers, not customers - Creates and requires the distribution of the Options Disclosure Document (characteristics and risks of standardized options) Must be sent to the customer at or prior of options trading. -Regulates exchange-traded options *Trade settlement between broker-dealers and the OCC is next business day (i.e., T+1).

Answer 590

Index options provide the opportunity to speculate on (or hedge against) the movement of the market, rather than movement of a specific stock. SPX tracks the S&P 500 Index. Unlike equity options, these options are cash settled: -the seller is obligated to deliver the cash difference between the closing index value and the strike price.

Answer 591

If investors have either long or short stock positions and want to hedge or protect against potential risk, they may purchase options. To protect (or hedge) stock in a volatile market: - When long stock: buy a put: - If the stock decreases, the gain on the put can offset the loss on the stock When short stock: Buy a call: -If the stock increases, the gain on the call can offset the loss on the stock.

Answer 592

Covered Call: - A call is written against stock that's already owned - The sale of the call generates income, thereby increasing the yield on the underlying security - considered a conservative option strategy Uncovered Call: - A call is written against stock that's not owned - Considered the most speculative option position with unlimited potential risk Covered Put: - A put is written when the investor has a sufficient amount of cash to satisfy the obligation of being exercised against on the put. Uncovered Put: - A put is written without having sufficient cash to meet the obligation of being exercised against on the put - There is significant risk if the underlying security falls

Answer 593

B. Writer of an option The term "opening sale" applies to the seller (i.e., writer) of a listed option. This designation must be written on the order ticket. An order to buy an option is marked as an "opening purchase." (73256)

Answer 594

A. $21 The formula for calculating the breakeven on a put is the strike price minus the premium (Put Breakeven = Strike - Premium). In this question, the put's breakeven is $21 ($25 strike - $4 premium). The buyer of a put wants the underlying stock's price to fall below the breakeven price (i.e., buyers of puts are bearish), while the seller of a puts wants the underlying stock's price to rise above the breakeven price (i.e., sellers of puts are bullish). It's important to note that the breakeven on put option positions is the same for both the buyer and seller (i.e., strike minus premium). (71759)

Answer 595

C. $500 If an option expires worthless, the maximum loss for the buyer (of a call or a put) is the premium paid. In this question, the buyer of the put has the right to sell 100 shares of XRT at the strike price of 50. At expiration, if the market price of XRT is above $50, the put will be out-of-the-money and will expire worthless. The premium paid by the buyer is the amount lost. The investor paid a premiums of $5 per share, which is $500 total ($5 per share x 100 shares). (71756)

Answer 596

D. A closing purchase If an investor has an open short position that she wants to liquidate, she will do so through a closing purchase. The following table indicates how to close an existing position: Opening Purchase = Establishes a long position Opening Sale = Establishes a short position Closing Purchase = Liquidates an existing short position Closing Sale = Liquidates an existing long position

Answer 597

B. $200 Put options are in-the-money if the market price of the underlying security is below the option's strike price (i.e., put down). Since XYZ is trading at $38 and the put's strike is 40, the put is $2 in-the-money, which also represents its intrinsic value. Since equity options have a contract size of 100 shares, the intrinsic value equals $200 ($2 intrinsic value x 100 shares). The time value of an option is the total premium less the intrinsic value. With a total premium of $500 and intrinsic value of $200, the remainder is the time value of $300 ($500 premium - $200 intrinsic value). (71733)

Answer 598

A. Intrinsic value is 3 and the time value is 1.50 Since the underlying stock's price ($43) is above the call's strike price ($40), the call is in-the-money and has intrinsic value. In this case, the call is in-the-money by $3, which also represents its intrinsic value. Since the total premium is $4.50, the call's time value is $1.50 ($4.50 total premium - $3 intrinsic value). (71737)

Answer 599

B. Writer of an option The term "opening sale" applies to the writer (seller) of a listed option. This designation must be included on the option order ticket. (71954)

Answer 600

A. 2100 Writing (i.e., selling) a put is a bullish position which means that the investor will lose if RST's stock price falls. If RST declines to zero and the buyer exercises the put, the writer will be obligated to buy 100 shares of RST at the put's strike price of $25 per share, or $2,500 in total. If the stock is worthless, the writer of the put will immediately lose the $2,500 investment, but will keep the $400 premium received for selling the put ($4 premium x 100 shares). Therefore, the investor's maximum loss is $2,100 ($2,500 loss on stock- $400 premium received). (71760)

Answer 601

A. Write covered calls Of the choices available, the most conservative strategy for increasing income in a portfolio is writing covered calls. The premiums received from the sale of the calls will increase the yield on the investor's portfolio of stocks. (71873)

Answer 602

B. Short the call, and long the stock A covered call is created when an investor sells a call option against a long stock position. Covered calls are more conservative than uncovered calls. If the stock's price rises and the call is exercised, the writer of the call is obligated to sell stock at the call's strike price. If an investor creates a covered call position and the call is exercised, the investor can simply deliver the stock that she currently owns. As a result, she's not required to purchase the stock in the market at a higher price. In this way, she has a lower potential loss than an investor who sells an uncovered call. (71891)

Answer 603

B. Bearish Sellers of call options are bearish (i.e., they want the value of the underlying stock to fall).

Answer 604

D. Leveraged ETFs Due to the inherent volatility of leveraged ETFs, they are appropriate as short-term trading vehicles. Each of the other choices are considered longer term investments.

Answer 605

D. Provided the second beneficiary is a member of the first beneficiary's family The assets in a 529 plan may be transferred to another beneficiary as long as the second beneficiary is a member of the first beneficiary's family. Family includes spouses, children, grandchildren, siblings, nieces and nephews, and first cousins.

Answer 606

A. Buying a put To hedge (protect) a long stock position, an investor should buy a put. If the value of the stock position declines, the put could be exercised which allows the investor to sell the stock at the option's strike price.

Answer 607

D. $750 10 M equal's $10,000 par value of bonds (the symbol M refers to thousands). The coupon rate is 7.50%. Therefore, the annual interest is $750 ($10,000 x 7.50%).

Answer 608

B. An equity income fund A mutual fund investor who is most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase an equity income fund. A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors who are seeking capital gains will most likely purchase a growth fund. A no-load fund is an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains. A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.

Answer 609

C. 7.60% If a bond is priced at a 7.20 basis, this means that it is priced to yield 7.20 or has a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield-to-maturity is 7.60%. The fact that the bond has a 6% coupon rate is relevant for determining whether the bond is trading at a premium or discount to par value. Since the YTM is greater than 6%, the bond is trading at a discount.

Answer 610

B. Determine their share prices once per day Open-end management companies (more likely referred to as mutual funds) have shares that are purchased directly from the mutual fund and only priced once per day. On the other hand, closed-end investment company shares are initially sold in an IPO with a fixed number of shares, and then the shares trade on an exchange.

Answer 611

B. They are actively managed. Mutual funds and REITs both have portfolios that are managed, with investments that are purchased and sold on a regular basis. REIT securities trade on exchanges, but mutual fund shares do not. Instead, mutual fund shares are redeemable by the issuer. Neither mutual funds nor REITs offer flow through of losses.

Answer 612

D. Short the call, and long the stock When writing (or selling) the call, the investor is said to be short the call. A covered call writer will currently own the underlying securities, and hence be long the stock.

Answer 613

D. The fund is passively managed and has lower management fees compared to funds that are actively managed Index mutual funds track the value of an index. Since the composition of stock indexes don't change frequently, index funds don't need to buy and sell shares in the portfolio very often. Investing in index funds is considered a passive investment strategy and index funds tend to have lower management fees. (17626)

Answer 614

A. The general partner The general partner has the most risk in a limited partnership. The general partner directs all management affairs of the partnership. He is responsible for all the liabilities of the partnership. The limited partner has no management capacity in the partnership. The limited partner's risk is his investment. Most direct participation programs are set up as limited partnerships, which provides for the flow-through of tax consequences and benefits to their investors (limited partners).

Answer 615

D. 4.4% A stock's current yield (also referred to as its dividend yield) is computed by dividing the current annual dividend by the stock's current market price. In this question, the current annual dividend of $1.10 is divided by the current price of $25, which results in a current yield of 4.4%. (15645)

Answer 616

D. Inform the client that this information can be obtained by reviewing the front of the fund's prospectus The front of a mutual funds prospectus is required to provide a standardized table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. The ratio is determined by dividing total expenses by the average net assets in the portfolio.

Answer 617

A. Yield-to-call The yield-to-call (YTC) represents a bond’s yield if it is called or redeemed prior to maturity; however, the yield-to-maturity (YTM) represents the bond's true yield if it is held to maturity. Since a premium bond's YTC is lower than its YTM, the YTC must be used when quoting the yield to a customer. A bond's nominal yield is its coupon rate or annual return, while a bond's current yield measures what the investor will receive each year based on her (potential) purchase price.

Answer 618

B. Access her funds Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. They are suitable for an investor seeking the other choices listed.

Answer 619

C. The next computed bid price on the day that the shares are redeemed. A mutual fund investor who redeems her fund shares will receive the next computed bid price on the day that the shares are redeemed.

Answer 620

A. 0.0536 A stock's current yield is found by dividing the annual dividend by the current market price of the stock. In this example, the stock's annual dividend is found by multiplying the $0.75 quarterly dividend by 4, which is $3.00. Therefore, the current yield is 5.3% ($3.00 ÷ $56).

Answer 621

D. Exercise price For a call option, the exercise or strike price is the price per share at which a buyer of the contract can purchase the underlying stock. The option's premium represents the price paid to acquire the option contract.

Answer 622

C. An S&P 500 Index mutual fund Although each of these investments are suitable for a client who's seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method. The closed-end fund shares are purchased on an exchange and the client pays the current market price plus a commission. Exchange-traded funds (ETFs) also trade on an exchange. While most broker-dealers are not charging a commission on ETF trades, some still do charge a commission. Index mutual funds don't assess front-end or back-end sales charges (i.e., they're no-load funds).

Answer 623

C. A premium Bonds may be quoted based on their yield-to-maturity, which in this example is 4.35 (basis and YTM are synonymous). Since the bond has a yield-to-maturity (basis) of 4.35%, which is lower than the 4.95% nominal yield (coupon rate), the bond is selling at a price that is above the par value of $1,000 (i.e., a premium). On the other hand, if the yield-to-maturity was higher than the nominal yield, the bond would be selling at a discount.

Answer 624

D. Rights of accumulation The rights of accumulation provision gives investors the ability to receive cumulative quantity discounts when purchasing additional mutual fund shares. Under the rights of accumulation provision, rather than using the original purchase price, the current market value of the investment plus any additional investments is used to determine the applicable sales charge. Once a breakpoint is reached, all future purchases qualify for the reduced sales charge. On the other hand, a letter of intent qualifies an investor for a discount that's made available through breakpoints without initially depositing the entire amount required.

Answer 625

Primary Market, new issue market. Scope of the law: - To provide for "full and fair disclosure" - Prospectus must precede or accompany any solicitation of a new issue (no marking or highlight) "disclosure document." -SEC "no approval clause." The SEC does not approve or disapprove the investments merits. Requires SEC registration of new issues: - Registration exemptions are provided to issuers of certain securities and specific types of transactions. Liability: - Unconditional for issuers regarding information to investors - Conditional for the underwriters that are required to perform: - Reasonable investigation - "Due Diligence" The underwriters will need to do a reasonable investigation, so if fraud happens they can prove they did an investigation. If fraud happens it can make the underwriters liable.

Answer 626

Public Offering ('33 Act): - Timing: Initial Public Offering, it is time consuming (registration process with SEC, disclosure, etc.) attorney and accounting fees -Follow-on offerings: already public company that is raising money more money. Follow-ons are covered under the 33 act. The shares come from (primary offering) proceeds go to the company. The shares from a secondary offering proceeds go to the selling shareholders (founders, officers, directors, venture capital firms). - Proceeds: Primary or secondary market Private Offering, Private Placement (Reg D Offering): -Exempt offering that does not involve a public distribution. It is a quicker and less expensive way to raise money. Offered to sophisticated investors (institutional investors). A Private Investment in Public Equity (PIPE) is the private raising of capital by a company that's publicly traded.

Answer 627

Firm Commitment: Syndicate (broker-dealers doing the underwriting) "takes down" the entire offering (or buying the entire offering). - Unsold Shares are directed to: Syndicate. The syndicate is acting like a principal (or dealer), meaning they are dealing from their own account (own inventory). Best Efforts: Syndicate sells what it can. - Unsold Shares are directed to: Issuer. The Syndicate is acting like an agent to the issuer. Best Efforts All-or-none: Offering is cancelled if all shares are not sold. -unsold shares are directed to: Issuer. The (broker-dealer) or syndicate is acting as an agent. Monies are held in an escrow account until all securities being sold. Then the money will be released. If the deal gets cancelled the investors get the money returned to them. Best Efforts Mini-Maxi: Offering is cancelled if a set minimum is not sold. -Unsold Shares are directed to: Issuer. Underwriters (broker-dealer) are acting as an agent. Stand-by: Syndicate agrees to buy any shares that are not bought through a rights offering. -Unsold Shares are directed to: Syndicate. Syndicate will act as a principal.

Answer 628

Shelf Registration. It will also be permitted for up to 3 years (max). Issuer and underwriter can adjust the terms of the offering to reflect the market conditions at the time of the sale. You can issue a "shelf" to issue so many issues for up to 3 years. You have to file a prospectus supplement for each time you come back to the market, which discloses what you are selling. All the information about the company and it's financials are done in the original shelf filing. This allows for new issues under shelf to be completed quicker.

Answer 629

Market-out clause, Based on the events that make marketing the issue difficult or impossible. - Reasons are limited and disclosed in the clause.

Answer 630

Issuer: You have an issuer who needs capital and they will hire an underwriter. Underwriting Manager: A Broker-dealer who will assist an ISSUER in this process. They will have a lead manager (investment banker). Responsibilities: - Facilitates distribution - Assumes liability that varies with offering type - Signs underwriting agreement with issuer Syndicate Members: One broker-dealer may not want to do the underwriting on their own. To spread risk they will work with a "syndicate" members who will (group of broker-dealers that get together to do the underwriting): - B/Ds assisting in selling and sharing liability - Signs Syndicate agreement with manager (agreement among underwriters), agreement among the group of broker-dealers (what percentage everyone is liable for, what happens to the unsold securities, etc.) Selling Group: -B/Ds accepting no liability, assist in sales only - signs selling agreement with manager How does the syndicate make money? The investors will invest money (found by broker-dealers). Bulk of the funds go to the issuer. The investors pay (for example) $14 for a public offering and $13 will go to the issuer. The dollar difference (Underwriting Spread) goes to pay manager's fee ($.15), Member's/underwriter's fee ($.25)(this is for the risk that the manager's are taking on), and concession ($.60).

Answer 631

1. Pre-Registration Period: - Prior to actually filing the registration statement with SEC. - Document preparation and due diligence begins -Registration statement is completed - B/Ds and RRs may have no communication with the public\ 2. Cooling-off Period: - After the filing of the registration statement, but it has not become "effective." - File the registration statement with the SEC - Issuer distributes preliminary prospectus (Red Herring) to investors to gain interest. There will be no pricing listed of the effective date. No firm orders or money accepted - "Blue Sky" the issue. State security laws. Registering the securities with the states. - Final due diligence meeting held, making sure they checked all the boxes for filing. Make sure everything is still current with whatever was disclosed. 3. Post Registration Period: - Once it goes effective, you can then legally sell the securities. - Effective Date (from the SEC) - Sales confirmed and Final Prospectus delivered - Must contain the SEC no-approval clause

Answer 632

Distribution participants that sell securities in the after-market must provide purchasers with a copy of the prospectus for a specific period from the effective date. Even after it goes effective and someone is wanting to buy in the secondary market. Those purchasers will need to be sent a "after-market prospectus." - For a non-listed IPO: 90 Days - For a non-listed, follow-on offering: 40 days - For an IPO of a security to be exchange-listed (NYSE or NASDAQ): 25 Days - For an exchange-listed, follow-on offering: no requirement *The more public information available about the company, the shorter the period.

Answer 633

A prospectus is any communication, written or broadcast, that offers a security for sale: - Statutory Prospectus: Condensed form of registration statements that provides detailed information on the offering. -Preliminary Prospectus: Also referred to as a "Red Herring"; used during the cooling off period: - Omits the offering price, underwriting and dealer discounts, and proceeds to the issuer. - once the final offering price is set, a final statutory prospectus is filed. -Summary Prospectus: Short-form prospectus typically used for mutual fund offerings: - Investor must be informed of statutory prospectus. - Free Writing Prospectus: Any communication that does not meet the standards of a statutory prospectus. - Includes legend recommending that investors read the statutory prospectus: - Examples: offering term sheets, e-mails, press releases, and marketing materials.

Answer 634

The following securities are exempt from SEC registration (from the '33 act): - U.S. Government and Agency Securities - Municipal Securities - Securities Issued by Banks - Securities issued by non-profit organizations - Short-term Corporate debt; maturities not exceeding 270 days - Securities issued by Small Business Investment Companies All remain subject to antifraud provisions of the act

Answer 635

- Regulation D - Private Placement: - A sales of securities directly to "accredited" investors and/or to a limited number of non-accredited investors. To sophisticated investors - Unlimited number of accredited investors: - officers/directors of the issuer - institutions - Individuals who have met a financial test: - net worth of: $1,000,000 (excludes primary residence, but can be together with your spouse). OR - Annual income of: $200,000 in each of the last two years ($300,000 for married couples) - No more than 35 NON-ACCREDITED investors

Answer 636

Purchaser Representative (no specific qualifications) - appointed by a non-accredited investor to evaluate the risks and merits of an offering - may not be an officer, director, or greater than a 10% owner of issuer, unless related to the investor Private Placement Memorandum (disclosure document): -not required if all investors are accredited - Required for all investors if any non-accredited investors are included - Includes the use of proceeds, suitability standards, and financials

Answer 637

Purchaser Representative (no specific qualifications) - appointed by a non-accredited investor to evaluate the risks and merits of an offering - may not be an officer, director, or greater than a 10% owner of issuer, unless related to the investo

Answer 638

Private Placement (offering) Memorandum. Required for all investors even if there are non-accredited investors included.

Answer 639

Permits the sale of restricted and control (affiliated) stock. Restricted Stock: Unregistered stock that's acquired through a private placement or as compensation for senior executives of an issuer (Do not go through the registration process) Control Stock(affiliated): Registered stock that's part of an issuer's public float and purchased in the open market by officers, directors, or greater than 10% shareholders of the issuer. If either restricted or control stock is being sold, the SEC must be notified: Form 144 filed by the time the sell order is placed. Restricted Stock has a 6 month holding period before it can be sold. Control does not have a holding period.

Answer 640

Provides an exemption for restricted securities that are sold to Qualified Institutional Buyer (QIBS are not a natural person). - QIB is defined as an institution that has at least $100 million under management - 144A securities may be equity or debt securities which are offered by domestic or foreign issuers - However, if securities of the same class are listed on an exchange, they are INELIGIBLE for 144A exemption - Typically used for corporate debt offerings. Remember, QIBs are institutions, NOT individuals (i.e., a wealthy individual is not a QIB).

Answer 641

This rule regulated reclassification of one security into a new security. Reclassifications are generally considered sales and subject to registration and prospectus requirements. - Subject to Rule 145: - Substitutions of one security for another - Securities that are a result of a merger/acquisition - Securities issued after a transfer of assets from one corporation to another. -Not Subject to Rule 145: - Stock splits - Reverse stock splits - Changes in par value

Answer 642

An intrastate offering: Provides an exemption for the sale of securities to residents of one state if: - The corporation has its principal place of business in the state and meets ANY ONE OF THE FOLLOWING FOUR REQUIREMENTS: 1. 80% of the assets located 2. 80% of the revenues generated 3. 80% of the proceeds used, or 4. A majority of issuer's employees are based in the state. 5. 100% of the buyers must be resident of the state of the offering - Resales to non-residents are prohibited for six months from the end of the distribution.

Answer 643

Municipal debt (bonds) issues are exempt from the registration and prospectus requirements. Issuing General Obligation (GO) Bonds: - Usually requires voter approval (because they are back by taxes) - Subject to debt limitations placed on the municipality which limits its ability to add debt above its debt ceiling. Issuing Revenue Bonds: - Doesn't require vote approval since they're backed by fees that are paid for use of the facility or service. - a consultant is hired to produce a feasibility study

Answer 644

There are two different methods that a municipality may use when selecting its underwriter: Competitive Sale (or method of underwriting): - Notice of sale (put out by the issuer) advertises the offering to underwriters - The notice is prepared by the issuer - Contains relevant details about the issue - Issuer is inviting underwriters to submit sealed bids - Underwriting generally awarded to lowest bid Negotiated Sale (or method of underwriting): - Issuer appoints its managing underwriter - Both issuer and underwriter "negotiate" terms of the deal Municipal Advisors - typically employed by a municipality to assist in the selecting an underwriter

Answer 645

Official Statement: Used by municipal issuers as a disclosure document (issuers do not have to make an official statement. However, it could make it hard to sell the municipal bonds) Legal Opinion: Prepared by Bond Counsel (Attorneys) which renders its opinions as to: - Issuer's legal, valid, and enforceable obligation - Tax exempt status of the issue - They do not give their opinion on the credit worthiness of the bond. The credit quality is determined by Moodys and Standard and Poors (S&P) New Issue Confirmations: Provided to purchasers, along with a copy of the official statement, by no later than settlement date. Committee on uniform securities Identification Procedures (CUSIP): Underwriters are expected to apply for a CUSIP (universal ID number) numbers that used to identify unique securities (e.g., issuer, coupon, and the maturity)

Answer 646

Electronic Municipal Market Access (EMMA): MSRB website used by issuers and underwriters to submit documents. - Electronic Access: - Provides electronic public access to information about the municipal market: - Trade Activity - Market Statistics - Various Documents: - Pre-sale documents - Official Statements - Continuing Disclosures - Includes 529 Plan information

Answer 647

B. The reimbursement for SEC registration fees Being reimbursed by an issuer for registration fees associated with filing a new issue is not a violation of FINRA rules. However, receiving compensation for publishing a quote and/or acting as a market maker are violations of FINRA rules.

Answer 648

B. The greater of 1% of the total outstanding shares or the stock's weekly average over the past four weeks After filing Form 144, the maximum amount of restricted or control stock that can be sold within a 90-day period is the greater of 1% of the total outstanding shares or the stock's weekly average over the past four weeks. The maximum amount of restricted or control stock that can be sold without the filing of Form 144 is 5,000 shares as long as the aggregate dollar amount doesn't exceed $50,000.

Answer 649

A. Split offering A split (or combined) offering is one in which some shares are offered by the issuer while other shares are offered by selling shareholders. The issuer receives the proceeds on the shares it sells, while the selling shareholders receive the proceeds on the shares they sell.

Answer 650

A. Spread The spread is the total compensation that underwriters receive and represents the difference between the public offering price and the price that underwriters pay to the issuer when they buy the shares. The spread is then split up to compensate the different members of the underwriting group through the takedown, additional takedown, and concession.

Answer 651

D. Initial public offering While this may also be referred to as a primary distribution, since this is the first time that the company is issuing securities to the public, it's best referred to as an initial public offering (IPO).

Answer 652

C. Justification The three methods of registering securities at the state level are notification, coordination, and qualification.

Answer 653

C. Additional takedown and the concession When a syndicate member receives credit for a sale of a new issue, the member receives the additional takedown plus the concession. The additional takedown plus the concession is referred to as the total takedown. The additional takedown is the portion received for assuming risk, while the concession is the portion received for selling.

Answer 654

Types of Capacity Broker-dealers can act in: -Brokers: - Remember, A-B-C (Agency, Brokers, Commissions) - Agency trades (agency transactions) are execute by Brokers and they charge Comissions - Brokers don't assume risk - Dealer: - Remember, P-D-M (Prinicipal Dealers Markups/Markdowns - Principal trades are executed by Dealers and they charge Markups and/or Markdowns

Answer 655

Market maker (a brokerage firm ready to buy or sell a security) quotes are inter-dealer (trade to other brokers or brokerage firms), but are adjusted when trading with retail customers: - Allows dealers to profit on trades with customers - Price adjustments are built into the trade, but are generally disclosed on the confirmation. For example: This quote shows the prices at which the market maker will buy from and sell to other dealers: Bid: 17.05 (brokerage firm will charge their clients plus the commission) Ask: 17.15 (if another firm buys these from the dealer, that firm will charge their clients will charge 17.05 to 17.15) Factoring in a $.05 markdown or markup, the prices to retail clients will be as follows: Price for selling client: 17.00 (this includes a $.05 markdown charged by the dealer) Price for Buying Client: 17.20 (this includes a $.05 markup charged by the dealer) If you are acting as an AGENT you charge commission. If you are acting as a DEALER you charge a MARKUP or Markdown.

Answer 656

FINRA has established a 5% policy: - The policy is NOT A RULE, but rather a GUIDELINE for commissions, markup, and markdowns: - Certain transactions may justify a higher markup/markdown (markup of higher than 5% can be justified for certain conditions. markdown of less than 5% is not a safe hardbor, if the dealer charges 5% for every trade it might be violation of the policy). - Other transactions may justify a lower markup/markdown Influential Factors: - Type of Security involved (equity or debt) - Availability of the security - Price (what is the price they are selling it for compared to the market price) - Amount of money involved - Pattern of markups - However, the type of client or whether the firm will profit is NOT relevant Jobs of the SRO is to protect the client to ensure they are being charged fair and reasonable markup/markdown. The policy applied to proceeds transactions (sell securities and on the same day you use the proceeds to buy securities): - When a client directs a B/D to liquidate securities and use the proceeds to buy other securities - Markup is calculated based on one trade (as if done for cash). Example: Let's say you sold $10k worth of securities today and on the same day you bought $10k worth of securities. Let's assume you were charged $300 markup/markdown on the first trade and $300 on the second trade for a total of $600. Question: Is it $600 of compensation given to the broker-dealer divided by $20k (total sum of all trades) or $10k. It is $10k. In a proceeds transaction you use the dollar value of the sale and you assume it is one trade. $600 divided by $10k is 6%. FINRA will publish FAQ and provides guidance for this type of situation, but this is subject to the 5% policy. The policy excludes: - Trades involving securities sold by prospectus or offering circular (e.g., new issues, mutual funds, variable annuities) (there is already compensation give to the dealer with underwriting fees for these securities) - Exempt securities (e.g., U.S. Government and Municipal Securities) - they are covered under other rules.

Answer 657

Discretionary accounts: When discretion is granted to a registered representative, it must be documented when used: - If the trading decision was made by the representative without consent to the specific trade, the order ticket must state that it was "discretionary." - If the trade was executed with the client's consent, the order ticket will state "discretion not exercised." For non-discretionary accounts: Any order ticket must indicate solicited or unsolicited. - if a trade was recommended by the agent and accepted by the customer the order ticket is marked "solicited." - if a trade is placed by a customer without the representative's recommendation, the order ticket is marked "unsolicited."

Answer 658

When an order is placed, it must be identified as either a: - Purchase: Trade may be paid in full or purchased on margin - Long Sale: Sale of securities that are owned by the customer. - Short (or short sale) Position Created By: - Sale of securities that are not owned by the customer: - Customer borrows from the firm and sells - Must deposit the appropriate amount of margin to borrow securities - Risk is higher and unlimited - Covered and uncovered options (i.e., the sale of call or put options) - If covered, no margin is required and risk generally limited - If uncovered, margin is required and risk may be significant

Answer 659

Market Order: - Customer wants to buy or sell - Customer specifies the security and size of the order only - Order is immediately executed at the best price available. Limit Order: - Customer ONLY WANTS to buy or sell at a set price or better - Customer specifies the security, size, and price - Order is only executed if the limit price is able to be met - Buy limit: at preset price or lower - Sell limit: at preset price or higher Example of Buy Limit Order: An investor is interested in ABC stock, which is currently trading at 30.75. Rather than placing a market order, she enters a buy limit order - Buy 1,000 ABC at $30 The trade will only be executed if ABC can be acquired at $30 or better (lower) Example of Sell Limit Order: ABC is currently trading at $29.40 and an investor who is long (investor who OWNs the stock) the stock is willing to sell her shares, Rather than placing a market order, she enters a sell limit order - Sell 1,000 ABC at $30. The sell will only be executed if ABC can be sold for $30 or better (higher)

Answer 660

May be used to limit a loss (it is not preventing a lost) or protect a gain (not guaranteeing a gain) Does not guarantee a specific price when buying or selling If Long Stock (Bullish, I own stock and I want the price to go up): - Long Stock Position: - Hope: Stock rises in value - Fear: Stock falls in Value - Need: Limit downside risk (enter sell stop order below the current market value) If Short Stock (Bearish, I want the market price to decline): - Short Stock Position: - Hope: Stock Falls in Value - Fear: Stock rises in value - Need: Limit upside risk (enter buy stop order (aka stop loss order) above the current market value)

Answer 661

Both stop and stop limit order are "triggered" (activated) when a trade occurs at, or through, the stop price: - Sell stop orders will activate at the stop price or lower - Buy stop orders will activate at the stop price or higher Once a stop order is activated ------> It Becomes a Market Order (immediate execution) Once a Stop Limit Order is activated -------> It becomes a limit Order (uncertain execution) Limit and stop limit orders may not provide protection since it's possible that they may not be executed. Example of Sell Stop Orders: An investor's long position in RST has risen in value; however, he's afraid of a potential decline. To limit downside risk, he enters a sell stop order - Sell 1,000 RST at $30 stop You could get a return or $30 or whatever the market is at when the sell stop order is triggered. Another example of Sell Stop (to limit a loss) Order: An investor bought 1,000 shares of DEF at $34 - The stock starts trading at lower prices - Afraid of a large loss, she enters an order: Sell 1,000 DEF at 30 Stop - Today's transactions: 30.35 30.70 30.38 29.87 29.85 Trigger Price?: 29.87 Execution Price?: 29.85 A stop order (which becomes a market order once triggered) can be executed at a price that's above or below the stop price A buy stop order example: An investor's short position in ABC has fallen in value; however, he's afraid of a potential increase. To limit upside risk, he enters a buy stop order: - Buy 1,000 ABC at $30 stop Trigger price is at or above $30 (becomes market order to buy at any price) Another buy stop order example: An investor is short 1,000 shares of DEF at $26 - The stock starts trading at higher prices - Afraid of a large loss, he enters an order: Buy 1,000 DEF at 30 stop - Today's transactions: 29.75 29.60 29.70 30.12 30.15 Trigger Price?: 30.12 Execution Price?: 30.15 A stop order (which becomes a market order once triggered) can be executed at a price that's above or below the stop price.

Answer 662

Different Qualifiers can be used to influence when and if an order is executed: Two of the more are: 1. Day order - unless otherwise indicated, all orders are day orders and are cancelled at day's end if not executed 2. Good-'Til-Cancelled (GTC) or open order- stays on the book until it expires, is executed, or is cancelled: - May be placed for one week, one month, or other specified period - Entering firm should periodically check with the exchange on which the order was entered - May be adjusted (stock splits for example, if certain events happen the order will be adjusted) for distributions on the security or partial execution

Answer 663

B. Inside market The high bid and low ask on a security are referred to as the inside market. (14256

Answer 664

C. The order is executed at 27.08. Buy stop orders are typically placed by short sellers as protection in the event that the stock's price rises. A buy stop limit order is triggered (activated) when the price reaches the stop price or above it. In this example, the order will be triggered if the stock's price rises to $27.00 or if it trades through (higher than) $27.00. Once a buy stop order is triggered, it becomes a market order. In this example, the buy stop order is triggered by the trade at 27.05 and then executed at $27.08.

Answer 665

D. She must execute the short sale in a cash account. When selling stock short, an investor is borrowing stock and will benefit if the stock drops in value (she's bearish). The potential losses for short sellers are unlimited. All short sales must be executed in a margin account.

Answer 666

A. The order is executed at 78.00. Unlike stop orders, a buy limit order is not one that gets triggered and then potentially executed. Instead, with a buy limit order, if the stock trades at or lower than the limit price, the order will be executed. In this example, the assumption is that the buy limit order would be executed once the price declines to $78.00.

Answer 667

D. The order is not executed. A sell stop limit order is triggered (activated) when the price reaches the stop price or below. In this example, the order is triggered if the stock's price rises to $62.00 or if it trades through (lower than) $62.00. Once a sell stop limit order is triggered, it becomes a limit order and can only be executed at the limit price or higher. Although this order would have been triggered at $61.94, since the stock failed to $62.00 or higher, the order was not yet be executed.

Answer 668

A. day order Without any qualifier on an order, it's assumed to be a day order. Good-til-cancelled (GTC) orders and open orders are synonymous. A not held order is one which allows a broker to assume unwritten discretion over the price and/or time of execution. (23617

Answer 669

B. Listed stocks The 5% Markup Policy applies to agency and principal trades involving exchange-listed and non-exchange-listed securities. However, mutual funds, variable annuities, new issues, municipal bonds, and government securities are exempt from the policy. Keep in mind, the 5% policy is a guideline, but not a rule. (23660)

Answer 670

C. The difference is considered the commission on a trade The difference between the bid and ask is referred to as the spread, which is a source of profit for market makers. Smaller or narrower spreads are evidence of a marketable security. A commission is added to a trade, not built within the trade. (14255)

Answer 671

B. 3.51% On a sale to a customer, the markup is calculated by taking the $0.55 difference in the sale price and the inside offer ($16.20 - $15.65) and dividing that difference by the insider offer ($.55/$15.65), which equals 3.51%.

Answer 672

1. Order Entry: Order ticket details regarding how a trade is to be executed 2. Execution: (buying or selling of the actual security) Occurrence of trade in a market center 3. Clearing: Executing firms agree to the details of a trade; any unrecognized trades may result in a DK (Don't Know) notice (one side of the trade is one brokerage the other side is another, but sometimes some details do not match up or they unfamiliar of the trade the one firm will send the other firm a DK notice). 4. Settlement - The day on which the customer's name is place on (buying) or taken off (selling) the issuer's books 5. Custody - Safeguarding of client and firm assets. The actual securites will be held (street name or in the name of the client).

Answer 673

Unless a specific exception is made, settlement (completion of the transaction between the firms involved) will occur as follows: -Corporate and Municipal Securities: One business day after the trade date (T+1) - U.S. Government Securities and Option Trades: One business day after the trade date (T+1) -Cash Settlement for any security: Same day as the trade date (both sides must agree) -Seller's option: Negotiated settlement; not earlier than two business days after the trade - When issued: As determined by the National Uniform Practice Committee (e.g., new issues, spinoffs, etc.)

Answer 674

Regulation T requires that customer payments (meaning not buying between firms) for purchases in cash and margin accounts be made promptly, which typically means by no later than two business days following regular-way settlement (i.e., S+2). According to the Federal Reserve, Regulation T payment must be obtained for transactions in either CASH OR MARGIN ACCOUNTS within two business days of settlement. (S + 2 or T +3) Exempt Securities: - Municipal Securities - U.S. Government (treasury) - For both of these securities, payment is generally due on settlement date For option trades, customers must make payment no later than third business day after the trade (T+3)

Answer 675

The DTCC provides clearing, settlement, and information services for depository - ELIGIBLE SECURITIES through its subsidiaries, including: - National Securities Clearing Corporation (NSCC) - central counterparty for clearing, settling, and guaranteeing U.S. equity trades - Depository Trust Company (DTC) - provides custody and safekeeping services for securities Transactions among members are completed through computerized bookkeeping entries: - Referred to as book-entry settlement - No physical delivery of securities DTC and DTCC can be used interchangeably

Answer 676

A member firm's transfer agent makes the final determination as to whether a security is in good deliverable form and may be transferred to the new owner. Good Delivery Requirements: - Properly Registered (example: Name of the owner matches the certificate) - Properly endorsed certificates (signature should match the name of the owner) - Signed stock power if the stock certificate is sent unsigned. For example: let's say you wanted to gift a stock to a family member and you cannot physically hand it to them. You DO NOT want to send it in the mail signed. You would send it unsigned and accompanied with a signed stock power - CUSIP numbers may be used to identify and clear Units of Delivery: - Stock transactions must be delivered in multiples of 100 shares (a round lot, you can deliver an odd lot only if you identified prior to delivery). 50 and 50 work because they add up to 100 - Bond transactions must be in $1,000 units or multiples thereof - 100 units adding to $1,000 are permissible *Restricted securities are not considered good delivery*

Answer 677

Signed stock power if the stock certificate is sent unsigned. For example: let's say you wanted to gift a stock to a family member and you cannot physically hand it to them. You DO NOT want to send it in the mail signed. You would send it unsigned and accompanied with a signed stock power

Answer 678

Responsible for handling the following corporate actions: - Stock Splits - Rights offerings - Proxies - Tender offers - Mergers and spinoffs - Exchange offers - Stock basis

Answer 679

The purpose of a stock split and a stock dividend: - A company's attempt to improve marketability of its stock - No economic gain or loss for holders - No change to issuer's capitalization - No change to holder's percentage of equity ownership If X is trading at $700 a share, how many people want to buy a 100 shares (1 round lot). That would be $70k. Not a lot of people will buy a round lot for that price. X may do a 7 to 1 split it make the stock a $100 a share versus $700. 2 Types of Stock Splits: - Forward (e.g., 2:1 or 3:2) - more shares, lower price (this is the norm) - Reverse (e.g., 1:5) - fewer shares, higher price - For both types, dividends per share are adjusted proportionately. Tax treatment: - Additional shares received are generally not taxed as income - Investor's total basis is unchanged, but basis per share is adjusted Example: If you owned 1000 shares and there was a 7:1 split you now have 7k shares the dollar value stays the same. You are not receiving any increase dollar value so there are no tax implications. When you sell your shares there will be tax implications.

Answer 680

Before the split: Shares = 100 shares and basis per share is $180 Remember the value after the split has to match the value before the split. The investor's total position is $18,000 After the split: Shares = 150 and basis per share = $120 (total position is still $18,000) How to calculate the new shares: You multiply 100 shares by 3/2 which = 150 shares How to calculate the basis per share: $180 x 2/3 (you need to do the inverse of the stock split) = $120 per share. ANSWER: The investor now owns 150 shares at $120 per share.

Answer 681

Before the split: Shares = 1,000 shares and Basis per share = $10 The investor's total position is $10k. The value before the split needs to match after the split. After the split: Shares = 250 shares and basis per share = $40. The investor's total position is STILL $10k. How to calculate new shares: 1000 shares x 1/4 split = 250 shares How to calculate the basis per share $10 x 4/1 (inverse of the stock split) = $40 ANSWER: The investor now owns 250 shares at $40 per share.

Answer 682

Preemptive Rights: - Provides existing shareholders (common stock) with the opportunity to purchase additional shares directly from the company - The subscription price is set below the current market - *Preemptive rights allow existing common stockholders to maintain their percentage of ownership* Mergers and Acquisition: - Merger - the combination of two companies - Acquisition - one company purchasing and assuming control of another Spinoffs: - A company may choose to spinoff a specific business unit to existing shareholders. You will end up with shares of the old company and shares of the new company - Shareholders receive new shares of the business unit Exchange offer: - you own one security and the company offers compensation to turn in the old security. Typically offer cash incentive plus the exchange of a new security. - a company purchased a whole bunch of companies and they try to sell off one of those companies after ownership.

Answer 683

A tender offer indicates the intent to buy shares from the owner at a fixed price: - The offer may be made by the issuer or a third party (the issuer may have excess cash and want to buy back their stocks for a fixed price - The offer is typically made to acquire a company or a controlling position and seat on the board of directors - The offer may be for all of the shares or a specific percentage (an acquisition, one company buying another, the buying company will buy all of their shares at a set price). Shares may only be tendered if an investor is long the stock or its equivalent, such as: - A convertible security (conversion not required) - A right or warrant (exercise NOT required) - A call option (ONLY if exercised), A call option is not offered by the company. You would have to exercise the call option, own the shares and then take part in the Tender offer.

Answer 684

You own numerous shares of stocks from different companies. Certain companies have to send out reports once a year. Sometimes you get the entire report, but sometimes you will get an envelope leading you online to download the whole report. When you receive these communications who is coming from? Two different ways to determine this for beneficial owners (person who benefits from the ownership of the stock) Beneficial Owners - investors whose securities are held in their name and recorded on the firm's books: Non-objecting Beneficial Owner (NOBO): Owner's who allow issuers (company directly from the company who owns the stock) to contact and send communications to them directly. Objecting Beneficial Owner (OBO): Owners who will not release personal information to issuers. - Instead, all communications must be sent through the OBO's broker-dealer What are the companies sending? - Proxies: - A voting power of attorney; must be immediately forwarded to customers. (these have to be done immediately by a set time. - By signing, the beneficial owner allows another person to vote on his behalf - Forms 10-K (annual) and 10-Q (quarterly): - Financial information that must be forwarded to all stockholders

Answer 685

Brokerage firms can charge for various levels of service. Two types of charging: Charging Issuers: - Member firms may charge issuers for forwarding materials to beneficial owners - Rates are subject to FINRA rules Charging Customers: - Member firms may charge customers reasonable costs/fees, but cannot discriminate between customers - Services include: - Safekeeping of securities - Collection of dividends and interest - Exchange or transfer of securities - However, charges for forwarding proxies or other financial information is the responsibility of the issuer.

Answer 686

A. When issued In the new issue market, securities may be authorized, but not yet available and are therefore unissued. In this situation, settlement is completed on a when issued basis.

Answer 687

A. Seller's option Delayed delivery is a settlement option in which the delivery of securities is made on a later date than the typical settlement date. This is also referred to as seller's option because the seller either cannot or chooses not to deliver on a regular-way basis. With seller's option, the delivery date can be the second business day after the trade or on a date that's specifically written in the contract.

Answer 688

C. An amount that's equal to the proportionate number of shares accepted. When a tender offer is made for a fixed number of shares and more shares are tendered, a proportionate number of shares will be accepted from those who tender their shares. For example, if twice as many shares are tendered than those for which the offer is made, each shareholder will have half of her shares accepted. (23703)

Answer 689

B. Physical delivery of securities are made through firms. In book-entry settlement, there's no physical delivery of securities. Instead, a registered clearing depository (e.g., DTCC) journals the movement of securities positions and funds between the clearing firm's accounts. This type of settlement requires the securities to be depository-eligible. (14271)

Answer 690

A. T + 1 The standard settlement for either opening or closing an option position is one business day after the trade date (i.e., T + 1).

Answer 691

Cash Account: Buyer pays full amount of trade Margin Account: - Long account: Client borrows funds from the broker-dealer to purchase securities - Short account: client borrows securities from the broker-dealer to sell short Options Accounts: based on the types of securities you are purchasing.

Answer 692

Margin: - Increases customer purchasing power - Increases risk of large losses due to adverse market changes - Subject to Regulation T deposit requirement of 50% (you are leveraging 2 to 1. Example buying $1k in securities you would need to put a down payment of $500. Credit Agreement (required): - The terms of the loan - Discloses interest amount, how computed, and when charged Hypothecation (Pledge) Agreement: - Customer hypothecates securities to B/D as collateral - B/D borrows money from a banking to replace the loan that was made to the customer Loan Consent Agreement (generally used for short sales): - Not mandatory for opening account (optional) - If signed, B/D is able to lend the customer's securities to others. Margin Disclosure Document: Must be provided to all customers opening a margin account and indicates: - A customer can lose more money than deposited - The firm can force the sale of securities or assets in the account - The firm can sell securities from the account without notifying the customer. - The customer has no control over which assets are sold to meet a margin call - The in-house maintenace requirement can be changed without prior written notification to the client - The client is not entitled to an extension for a margin call.

Answer 693

Due to high risk in option accounts, option trading may not be suitable for all clients (they will provide a disclosure stating this). Firms must gather client information through option account agreement, including: - Names of those with trading authority - Financial status, objectives, experience - Data need not be verified If the client does not provide request information, a note is made on the agreement. A copy is sent to the client for his eventual signature (verification) along with the OCC's options disclosure document (ODD) Within 15 calendar days after a customer's account has been approved for options trading, the firm must obtain from the customer a written agreement that she's aware of and agreed to be bound by the rules that are applicable to the trading of option contracts.

Answer 694

If a client is to authorize ANOTHER PERSON (usually to a registered representative/ broker) to make investment decisions in her account or deposit and/or withdraw funds, the following forms/steps are required: - An authorization form signed by the client and person grant authorization (Power of Attorney or trading authorization): - Principal must approve the account in writing prior to its opening - Each order must be reviewed and approved promptly by a principal (not in advance, it can be done the same day of the trade not prior to) - Activity must be monitored for potential churning *Power of attorney: Grants a person other than the account owner with the authority to act on the owner's behalf without the owner's prior knowledge (if a relative was selected or third party was selected you will have a third party account)* - Limited Trading Authorization (Most POAs are limited): - Allows for execution trades (they cannot withdraw cash or funds from the account) - Full Trading Authorization - Allows for execution of trades, withdrawal of cash and securities, check-writing privileges

Answer 695

The Three "A"s: For Not Held orders, the customer specifies the Action, the Amount, and the Asset. - Allows client to provide oral authorization for trade execution - Avoids the need for discretionary authority if RR decisions are limited to time and/or price of execution - Client specifies whether to buy or sell, the quantity, and the security - "Sell 1,000 shares of XYZ whenever you think the time and price is right" - Not held orders are only good for one day; if longer, written authorization is required.

Answer 696

Advisory and custodial fees, along with transaction costs, are wrapped into one comprehensive annual fee. - Traditional accounts charge on a per transaction basis assessing a commission on each trade - fee-based accounts roll all of the costs for services into one fee - Wrap accounts are a type of fee-based accounts Suitability considerations: - Are the services appropriate given client's needs? - Are the fees reasonable given the client's trading history? - Unsuitable for clients who trade infrequently (buy and hold) - Designed primarily for active traders

Answer 697

Coverdell Education Savings Account (CESA): A trust or custodial account that's created for the purpose of paying the qualified education expenses of a designated beneficiary: - Maximum Contribution: $2,000 annually per child up to age 18. - Contribution is non-deductible, but earnings are tax-free if used for qualified education expenses (contribution eligibility is subject to income limits) - CESAs may be used to pay for private education on any level (i.e., kindergarten through college) - Funds must be used by the child's 30th birthday or transferred to a relative's CESA 529 Plan: - A plan that is generally operated by a state and designed to meet the costs of both college and K-12 education - Allows for much larger contributions than what CESAs allow - Covered in greater detail in Chapter 8

Answer 698

Individual: - Opened by, and for, one person - Only the account owner can dictate trades - Third party authorization may be granted to another person - Numbered or Nominee accounts are permitted: - The account may be opened under a number or code name - Provides privacy for the individual - Customer Identification Procedures (CIP) requires firms to maintain records of the beneficial owners. Joint: - New account information is obtained for each owner - Any owner may initiate activity - When signatures are required, all owners must sign - Checks are made payable to all parties - Joint Tenants with Rights of Survivorship (JTWROS): - Common for spouses - Each tenant has equal ownership - If one owner dies, ownership passes equally to surviving tenant(s) without probate - Joint Tenancy in Common (JTIC) - Each tenant owns a specified amount - If one owner dies, decedent's portion is transferred to her estate - Common for business partners Custodial (minor): UGMA/UTMA: Custodial Accounts - Uses a standard new account form titled "custodian for minor" - One Minor (legal Owner): - Responsible for taxes; minor's Social Security Number is on the account - If child dies without a will, state law determines distribution - One Custodian (Any Adult): - Has authority to initiate activity (prudent investments) - Under the Uniform Prudent Investor Act (UPIA), a custodian may delegate investment functions to a third party - Gifts: - Irrevocable; may be cash and/or securities - Covered options and penny stock transactions may be permitted - No Margin (i.e., no uncovered options, short sales, commodities) - No limit on number of donors or on the value of gifts - Taxes may be due from donors if gifts exceed $18,000 per year *When the child turns 18 the assets are transferred into an account into the minors (now adults) own name. Custodian needs to always sign the documents* Trust accounts: Trust - legal arrangement in which an individual (creator) gives fiduciary control of property to a person or institution (trustee) for the benefit of beneficiaries - Revocable - also referred to as living or inter vivos trusts - A person has the ability to revoke or change any terms in the trust - Does not reduce estate taxes, but avoids probate if funded prior to donor's death - Irrecovable - Cannot be changed after being signed - Will reduce estate taxes and avoids probate Fiduciary: - A fiduciary is defined as a person or organization that owes to another the duties of good faith and trust - Documentation is often filed with a court in order to get court approval of the actions of the fiduciary Corporate: - Always examine Corporate Resolution - Corporate by laws to see if the company is legally authorized to open this account - To open an option or margin account, the Corporate Charter must also be examined Partnership: - Partnership agreement specifies persons authorized to execute trades - Information must be collected on each managing partner

Answer 699

Traditional IRAs: - 100% of earned income, up to a maximum of $7,000 (6% penalty for overfunding) (has to come from a salary to contribute) - Spousal option: extra $7,000 ($7,000 for myself and $7k for my spouse) - Age 50 or older: Extra $1,000 - May be a deductible contribution - Contribution is always allowed (regardless of age if still working) - Required Minimum Distribution (RMD) by Apr. 1 of the year after owner reaches age 73 (tax penalty for failure) - Withdrawals are subject to tax Roth IRAs: - 100% of earned income, up to a maximum of $7,000 (6% penalty for overfunding) (has to come from a salary to contribute) - Spousal option: extra $7,000 ($7,000 for myself and $7k for my spouse) - Age 50 or older: Extra $1,000 - Contribution is NEVER deductible - Higher income individuals may not contribute - No withdrawal requirement - Qualifying withdrawals are tax-free Example question: You have someone who is 54 how much can they contribute to their IRA? $8k total ($7k from earned income and an extra $1k since they are over 50). You have a couple who is 54 and 53 yeras how much can they contribute to their IRA? $16k total ($8k for one partner and $8k for the other partner, $7k from earned income and an extra $1k since they are over 50). For Both Tradtional and Roth IRAs: - Early Withdrawal Penalty: - Before age 59 1/2 and 10% of taxable amount - In a Roth IRA, the first contribution must have been made at least five years prior - Exceptions: death, disability. qualified higher education expenses, up to $5,000 for expenses associated with the birth or adoption of a child, or qualified first-time homebuyer distributions ($10,000 lifetime limit) - Rollovers and Transfers (no penalty) - Rollover: - Owner receives proceeds - Once per year (rolling 12 month); completed within 60 days - Trustee-to-trustee Transfer: - Owner does not have access to the funds - May be more than one per year

Answer 700

Funded with after-tax contributions. Example: You made $100,000 after-tax contributions and $100,000 of taxed deferred earnings. You pay taxes on earnings as income before you receive the withdrawal. ONLY EARNINGS are TAXABLE.

Answer 701

ERISA (Employee Retirement Income Security Act of 1974 was created to prevent misuse and mismanagement of (corporate or individual) pension plan funds: - Rules apply to private sector defined benefit and defined contributions plans. - Determines qualified status: - Employer and employee contributions are tax-deductible - Earnings are typically tax-deferred - Plans must not be discriminatory and offered to all employees who: - Are age 21 or older - Have at least one year of full-time service (1,000 hours) - An approved vesting schedule must be followed: - Specifies the percentage of the employer's contributions to which the employee is entitled when withdrawing from the plan - Employees are 100% vested in their own contributions.

Answer 702

Tax status of contributions: - Pre-tax contributions have a zero cost basis (taxable at withdrawal) - After- tax contributions are part of cost basis (tax-free at withdrawal) Earnings typically grow tax-deferred (not tax free), meaning they are not currently taxable, but will be taxed at some future point in time. *Retirement plans never generate capital gains or losses* Tax Status of distributions: - Any portion representing pre-tax contributions is taxable as ordinary income - Any portion representing after-tax contributions is a return of capital and not taxed: - Earnings are typically taxed as ordinary income - Subject to required minimum distributions (RMD)

Answer 703

401(k) plans: - Employees may elect to contribute (generally pre-tax) - Generally have a zero-cost basis since they are funded with pre- tax contributions, with earnings that grow tax-deferred - Contributions are subject to a maximum annual amount - Employers may match contributions but are not required to do so: - Matching may be based on a profit-sharing plan - Employers that maintain 401 (k) plans must have a dual eligibility requirement under which employees are eligible if they satisfy either: - A one-year of service requirement (or 1,000 hours) or - three consecutive years during with the employee provided at least 500 hours of service Profit-sharing plans: - Contributions, made by the employer, are discretionary, decided by the BOD (Board of Directors) - Contributions are subject to a maximum annual amounts - Allocation of contributions to employees is based on a predetermined formula

Answer 704

C. $2,000 When the initial transaction in a margin account is the short sale of securities, the minimum required deposit is $2,000 or 50% of the market value, whichever is greater. Since $2,000 is greater than $750 ($1,500 x 50%), $2,000 is the required deposit. (14280)

Answer 705

B. $4,000 Regulation T requires a deposit of 50% when purchasing securities in a margin account. As a result, this $8,000 purchase ($80 x 100 shares) requires a deposit of $4,000 ($8,000 x 50%).

Answer 706

B. Employee participants should be aware of the risk of investing too much in their employer's stock. Employee participants should be aware of the risk of investing too much in their employer's stock. If the stock performs below expectations, a significant decline could be exhibited in the amount available for retirement. Contributions are made in pre-tax dollars and there's a limit to the amount that can be contributed annually. The employee determines the allocation of contributions from a list of investment options selected by the employer. The employer doesn't determine the investments into which the contributions are allocated.

Answer 707

B. $1,500 When the initial transaction in a margin account is a purchase of securities that are valued at $4,000 or less, the required deposit is the lesser of the market value of the securities or $2,000. In this case, since the $1,500 purchase price is less than $2,000, the required deposit is $1,500. However, if the initial purchase exceeds $4,000, the required deposit is 50% of the market value.

Answer 708

B. To the beneficiary's estate The trust was established for the beneficial owner (trust beneficiary) and the funds were managed by a fiduciary or trusted person. Therefore, upon the death of the beneficial owner of the trust, the assets are directed to the beneficiary's estate. (23738)

Answer 709

C. Orders must be approved verbally by the customer prior to execution. When transacting business for a discretionary account, the registered representative must have written power of attorney authorizing her to act for the customer. Each order in which the registered representative exercises discretion must be marked "discretionary." The registered representative should not enter orders that are excessive in size or frequency (to do so is considered churning and done to generate commissions). The registered representative makes the investment decisions and doesn't need to receive the customer's approval for each order being executed.

Answer 710

Required information: - Name of the customer: - Numbered or coded account is acceptable - Address: - Cannot open with P.O. Box only (military P.O. Box is acceptable) - Whether of legal age - Registered representative(s) of record - If the customer is an institutional customer (banks, pension funds, insurance companies, etc., assets in excess of $50 Million or more) there will not an RR of record. - Signature of supervising principal Copy of the above information must be provided to clients at least every 36 months *customers are NOT required to sign their new account forms* Additional information: Prior to settlement of the initial transaction, a REASONABLE EFFORT MUST BE MADE TO OBTAIN the following customer information (this does not apply to institutional accounts): - Tax I.D./ Social Security Number - Occupation as well as name and address of employer - Whether associated with another member firm *If a client refuses to provide any requested information, the RR should document the refusal*

Answer 711

(opposite from FINRAs non-requirement) According to SEC Rule 17a-3 broker-dealers are required to maintain the following records: - Name and Tax ID number - Address, telephone number, and date of birth - Employement status and whether associated with another broker-dealer - Information to assist in determining suitability: - income - Net worth (excluding prinicipal residence) - Risk Tolerance - Objectives

Answer 712

Failure to update client information on a timely basis may result in the execution of unsuitable transactions or regulatory issues: - If a client moves to a new state, both the firm and the RR must be registered in that state in order to continue conducting business with the client - Changes in the financial background of a client (for better or worse) must be documented - A different pattern of transactions may indicate a change - Objectives are typically adjusted as customers age. *FINRA rules requires firms to send a copy of updated changes to a customer within 30 days or at the time the next statement is mailed*

Answer 713

The basics of Suitability: Suitability is based on the client's profile when an account is opened: - Applies to recommended transactions and investment strategy - Suitability is not determined by gains and losses - RRs may not place their own interests aheads of the client's, such as: - Recommending one product over another to generate a larger commission Institutional Suitability: The extent of the obligations are based on: - Those servicing the account having a reasonable belief that the client is capable of evaluating investment risks - The institutional client affirmatively stating that it's exercising independent judgement

Answer 714

Under FINRA's three main suitability obligations, a member firm and its registered representatives must have a reasonable basis to believe that: - The Reasonable Basis Obligation: A recommendation is suitable for at least some investors (does not have to be good for all but for some of their clients) - The Customer-Specific Obligation (the most important): A recommendation is suitable for a particular customer based on the customer's investment profile (this provision does not apply to institutional customers) - The Quantitative Obligation: A series of recommended transactions, even if suitable for a customer, are not excessive when the customer's investment profile is taken into consideration.

Answer 715

Customer Identification Program (CIP): - B/Ds must verify the identity of each customer within a reasonable period of time from the account opening - Why? (Terrorism and/or money-laundering concerns) Three Stages of Money Laudering: 1. Placement: Illegal cash is placed in the broker-dealer's business 2. Layering: A series of transactions are executed which are meant to avoid detection (e.g., structuring) 3. Integration: Proceeds from the previous transactions are put back into the stream of commerce

Answer 716

Under Bank Secrecy Act (BSA), certain reports are sent to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Department of Treasury Bank Secrecy Act Transaction Report (BCTR): - Filed for all cash transactions executed by a single customer during one business day that exceeds $10,000 (also filed for structured transactions) - Filed within 15 Calendar Days *A violation could result in a 20-year prison term and the greater of a $500,000 fine per transaction or twice the amount of the funds involved.* Suspicious Activity Report (SAR): - Filed whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm is suspicious of the activity - Filed within 30 calendar days - Suspicious activity should also be reported to a principal

Answer 717

A member firm must establish an AML program to detect money laundering schemes and suspicious transactions: - Program requirements include: - Appointing an AML compliance officer - Creating written procedures, including training for personnel - An independent audit function to test the program's effectiveness - However, there's NO requirement to file reports with a regulator

Answer 718

Required Identifying Information: - Name - Legal Address (residence of business) - Date of Birth - Identification number (which may be different for U.S. persons compared to non-U.S. persons) Identification Number for U.S. Persons: - Taxpayer ID or - Social Security Number Identification Number for Non-U.S. persons: - One or more of the following: - Taxpayer ID - Passport number - Alien ID card number - Any other government-issued document establishing residence and identity Office of Foreign Assets Control (OFAC): - An OFAC list is maintained to identify the names of terrorists and/or criminals - If a client's name appears on the OFAC list, transactions are blocked and law enforcement is notified - Also known as the Specially Designated Nationals of SDN list

Answer 719

Privacy: - Firms may not disclose client information unless: - ordered by a court or government entity or - client provides WRITTEN permission: - A person does not have the right to know the content of his spouse's account Regulation SP: - Created rules for protecting privacy of clients' confidential information -Clients provided with "privacy notice" at the opening of account and annually thereafter -Requires disclosure of information that's shared and with whom it's shared - Requires a reasonable "opt-out" provision

Answer 720

Federal Trade Commission's (FTC) Red Flag Rules: - Financial institutions must create and implement policies and procedures to detect and address identity theft - Intent is to protect the client's assets Use of Stockholder Information for Solicitation: - Firms are prohibited from using client information for solicitation purposes - Permitted if specifically directed to do so and it is for the benefit of the corporation

Answer 721

Account Statements: - Sent by broker-dealers at least quarterly - For active accounts, sent monthly Holding Customer Mail: - Firm must receive written customer instructions - Instructions must include the time period during which the mail will be held - If the requested time exceeds 3 consecutive months, customer instructions must include a valid reason - Whether the customer's instructions still apply must be verified at reasonable intervals

Answer 722

Sent on, or before, settlement of the transaction. Confirmation information: - Execution details: - Name of the customer - Buy/sell - Price and quantity - Trade and Settlement dates - Firm capacity (agent or principal) - For bonds, dollar price and yield information - Name of contra party or a statement of the availability of the information upon written request

Answer 723

Correspondence: - Written or electronic communication that a member firm distributes or makes available to 25 or fewer retail investors (prospective or existing) within any 30-calendar-day period - Subject to review and supervision Retail Communication: - Written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within any 30-calendar-day period - Often subject to preapproval and filing

Answer 724

A.K.A. Cold Call list Telemarketing calls may be made on any day, but only from 8:00 a.m. to 9:00 p.m. local time of the person being called (residential only). Exclusions: - The time-of-day restriction doesn't apply if the person: - Has made any unsolicited inquiry of the firm - Has engaged in a transaction with the firm within 18 months Information Provided: - The caller must provide: - Both his name and his employing firm's name - The firm's phone number or address - The purpose for the call Do-Not-Call List: If requested, a client must be placed on the firm's "DO NOT CALL LIST" within 30 days and will remain there indefinitely: - Before placing a call, a firm must review the FTC's National Do- Not-Call Registry *Transmitting unsolicited advertisements via fax machines is prohibited*

Answer 725

On a daily basis, broker-dealers are required to obtain and maintain physical possession or control of all fully paid and excess margin securities belonging to customers. Control: Good control locations include an SEC-approved depository (domestic and foreign) such as the DTC or in-transit between the offices of a broker-dealer Excess Margin Securities: The value of margined securities that exceeds 140% of a customer's debit balance. (example: (regulation T is 50%) Customer bought $100k in securities via a margin account. They would need to put in $50k cash to be lent the other $50k to buy the securities. Brokerage firm has to pledge assets to a bank to borrow the cash. If you want to borrow $50k you are required to deposit 140% of the $50k. $70k will need to go to the bank as collateral. The $30k will be the excess value. Customers: -Any person for whom the B/D holds funds or securities or any omnibus account that is maintained by a B/D on behalf of its customers - Excludes B/Ds, general partners, directors, principal officers, or subordinated lenders.

Answer 726

A free credit balance represents customer proceeds resulting from sales, dividends, or interest payments that have not been withdrawn or invested - A statement must be sent to customers at least quarterly - The statement must indicate the total amount due and that it’s payable on demand - If statements are sent more frequently than quarterly, a notice of free credit balance must be included

Answer 727

Broker-dealers must obtain a fidelity bond as insurance coverage against losses as a result of: - Fraudulent trading, loss of securities, or forgery - NOT errors and omissions or B/D bankruptcy (covered under SIPC) *If the bond is substantially modified, terminated, or cancelled, FINRA must be notified immediately.*

Answer 728

A written plan identifying procedures to be followed due to an emergency or significant business disruption must be made available to FINRA promptly on request BCP Must Address each of these points: Regulatory Reporting Emergency contact information of two persons (one must be a member of senior management and a registered principal) Communication with regulators (e.g.,SEC and FINRA) Alternative locations for employees to continue working Communications between firms and clients and between firms and employees Ensuring that mission-critical systems (computers) continue to process transactions promptly

Answer 729

Lifetime: Corporate and partnership documents Six Years: Blotters (records of original entry), ledgers, new account forms, account statements, powers of attorney, municipal complaints* *FINRA requires complaints to be maintained for four years* Three Years: Order tickets, confirmations, Forms U4 and U5, employee records, all forms of communication, trial balances *All records must be maintained in an easily accessible place for the first two years.*

Answer 730

B. If the firm intends to disclose information about the consumer. For purposes of Regulation S-P, a “customer” is an individual who has an ongoing relationship with a firm, while a “consumer” is an individual who doesn't yet have a relationship. A firm is only required to provide a privacy notice to consumers if it intends to disclose any information about the consumer to non-affiliated third parties. On the other hand, customers must receive the privacy notice at the time their account is opened and annually thereafter. Both customers and consumers must also be given adequate notice of their ability to opt out of having their personal information shared with third parties, and the means by which they may opt out must be reasonable. (23783)

Answer 731

C. Within 30 days When there's a change to a client's account information, the broker-dealer must update its records and forward the change to the client within 30 days or at the time the next account statement is sent.

Answer 732

D. Maintaining a record of wire transfers in excess of $3,000 A financial institution's AML program must contain policies, procedures, and internal controls that are designed to comply with the Bank Secrecy Act (BSA). One of the requirements is that broker-dealers must retain records for transmittals (e.g., wires) and transfers of funds in excess of $3,000. If the person making the request is not a customer, the broker-dealer must also verify the person's identity.

Answer 733

A. Only on purchases made at the public offering price A primary offering of securities for a company that is already exchange-listed requires that prospectuses be delivered only on purchases, at the public offering price (POP). There is no aftermarket delivery requirement.

Answer 734

A. To create an order book and allocate the stock to investors The syndicate guarantees (i.e., underwrites) an offering. A broker-dealer’s syndicate desk assists in the pricing of the offering, helps to build the book of orders, markets (distributes) the issue, and allocates the stock to investors.

Answer 735

B. The CEO of a financial institution which has $150 million of securities Qualified institutional buyers are entities that have at least $100 million of investable securities. The term institution includes insurance companies, investment companies (mutual funds), investment advisers, employee benefit plans (pension funds), or other types of institutional investors. Individual investors, even if they have at least $100 million of investable securities, are not considered to be QIBs. Choice (d) is a QIB since the definition also includes banks and savings and loan associations that have a net worth of at least $25 million.

Answer 736

B. The customer's original purchase price for the stock A sell order ticket doesn't indicate the investor's original purchase price. All order tickets must contain the customer's account number, whether discretion was exercised, whether the trade was solicited by the registered representative or unsolicited, and it must also indicate the client is selling long (shares that are owned) or selling short (shares that are borrowed). If the client is long the stock, the location of the securities must be indicated (long in the customer's account or held by the customer). (37237)

Answer 737

B. Customer The beneficial owner of stock held in street name (the name of the firm) is the customer whose name is recorded internally on the firm's stock record.

Answer 738

D. On March 12 For corporate securities, regular way settlement is one business day following the trade date. In this question, the settlement occurs on Thursday, March 12. The key to this question is understanding that any corporate transactions that are executed in either cash or margin accounts will settle on a regular way basis (i.e., T + 1). However, if a question references a cash trade, a cash transaction, or a trade settling for cash, it has special treatment and will settle on the same day as the trade.

Answer 739

B. A customer's name, address, and phone number obtained on the internet Under Regulation S-P (Safeguard Procedures), personal public information is information that a person reasonably believes is lawfully made available to the general public. According to Regulation S-P, any information that's obtained in connection with a financial institution cannot be considered "public." In most circumstances, information that's obtained through an internet search is most likely considered "public" information.

Answer 740

A. Official statement Municipal securities are exempt from the registration provisions of the SEC. Therefore, a registration statement and prospectus are not required. Municipal issuers voluntarily provide the same financial information that would be found in a prospectus. This detailed financial information is found in the official statement. The notice of sale contains information pertaining to a competitive offering of bonds such as the time, place, date of sale, and type of offering.

Answer 741

C. 18.50 After the order was activated by the round-lot sale of 18.25 (which is at or lower than 18.50), the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and is the execution price.

Answer 742

C. Must record the customer's refusal on its records and use whatever information it can obtain on its own in determining whether it should accept the account for options trading According to the rules of the options exchanges, the brokerage firm must record the customer's refusal on its records, and must use whatever information it can obtain on its own in determining whether it should accept the account for options trading.

Answer 743

Primary regulated the secondary market. The 1934 Act prohibits manipulative and deceptive practices in the sale of securities. Rule 10b-5 includes specific anti-manipulation provisions which states: "It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange" a) To employ any device, scheme, or artifice to defraud b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person In connection with the purchase or sale of any security: - Rule 10b-1 – Stipulates that antifraud rules also apply to exempt securities - Rule 10b-3 – Stipulates that broker-dealers are prohibited from engaging in fraudulent practices

Answer 744

Market Rumors: Spreading false or misleading information to influence the price of stocks and/or bonds Front-Running: RRs executing trades (on your own account) for proprietary accounts (or those for which they have discretion) ahead of a customer’s block order (a market moving order). Buying or selling trades on your own account before completing the block, or even buying puts. Marking-the-close/opening: Effecting trades near the opening or close of trading in an attempt to influence a stock’s closing price up or down Churning: Excessive trading in a client’s account for the purpose of generating additional fees and commissions (churned in high quality stock or low quality stocks. The quality of stock does not matter it still can be considered for churning) Interpositioning: Refers to the insertion of a third party between a customer and the best market. - Prohibited if detrimental to the customer, but acceptable if advantageous (Generally prohibited if a broker-dealer goes to another broker-dealer to buy and trade on the market) Trading ahead of customer orders: Occurs when, after accepting and while holding a customer order, the dealer executes an order for the same security, same price, on the same side of the market for its own account. - The obligation is to fill the customer’s order first. - An exception exists if executed by a different department at the same firm if information barriers exist. Quoting a Security in Multiple Mediums: Refers to displaying quotes on the same security in multiple markets. - Permitted if quotes are at the same price.

Answer 745

Regulation M (or Reg. M) was created to prohibit manipulative conduct by persons (distribution participants) that have an interest in the outcome of an offering. Regulation M contains rules to prevent manipulation by persons with an interest in the outcome of an offering and prohibits activities that could artificially influence an offered security's market Some of the rules under Reg M include: - 1. Limits bids and purchases by distribution participants (Broker-dealers, underwriters and selling group members) - a. Prevents conditioning the market by restricting trading for a specific period (restricted period) - 2. Allows for passive market making (they cannot bid higher than the highest independent bid, another broker-dealer who is not part of the distribution. Brokerage firm bid $10 a share the market maker cannot bid any higher than $10. - a. Permits distribution participants to execute unsolicited trades to maintain marketability of the security - 3. Permits stabilization of the new issue to protect its price from falling substantially. Cannot bid higher than the public offering price. Syndicates cannot bid higher than the public offering price.

Answer 746

If a firm has knowledge of material, non-public information regarding the contents of a research report, it may NOT establish, increase, decrease, or liquidate an inventory position in a security or its derivative. - Executing proprietary orders is prohibited until the information is released publicly. * Applies to equity, debt and derivatives. * Covers exchange and non-exchange listed securities. - Information barriers must exist between trading and research departments. * Barriers prevent the flow of information between the departments

Answer 747

A market maker that publishes a quote is obligated to buy or sell at its stated bid or offer and up to the size quoted. For example: Bid= 10.00 and Ask= 10.05 The Market Maker must buy at 10.00 and sell at 10.05 (in addition to prices there will also be a size associated with it) *Failure to do so is considered (failure to honor) "backing away" (a violation).*

Answer 748

- The Reg. T payment must be obtained for purchases that are made in either cash or margin accounts within two business days of settlement (S+2) (T+3). (If the customer does not pay within 2 business days they would sell them out on S+3 or T+4) - Before settlement, a customer can request that the broker-dealer transfer a trade from a cash account to a margin account - If no payment is made, the position is closed out (securities sold) on the third business day following settlement (S+3 or T+4) - The result of non-payment is that the account is frozen for 90 days (all payments must be made in advance). They can still trade the customer just has to pay in advance. *An investor who buys a stock and subsequently sells it, but fails to meet the Regulation T requirement, is guilty of freeriding.* (you cannot buy the stock one day and resell it before the settle date)

Answer 749

The following actions are prohibited: - Coordinating price quotes, transactions, or trade reports with other market makers - Threatening, harassing, or intimidating other market makers - Retaliating against or discouraging the competitive activities of another market maker

Answer 750

Best Execution: FINRA and MSRB rules require a dealer to use reasonable diligence to obtain best execution for their customers. Factors include: - The character of the market for the security - The size and type of the transaction and number of markets checked - The ease of obtaining a quote and the terms of the order MSRB Time of Trade Disclosure: According to the MSRB, dealers are required to provide customers with all material information that is known or reasonably available at or prior to time of trade. - These requirements apply for both solicited and unsolicited trades, trades that occur in the primary or secondary market, or for agency or principal trades.

Answer 751

The Inside Market The inside market is the spread between the highest bid price and the lowest offer (ask) price in a quoted financial product. Historically, the inside market consisted of prices provided by market makers, but in the electronic trading age, it may be created by other participants as well

Answer 752

Best Execution: FINRA and MSRB rules require a dealer to use reasonable diligence to obtain best execution for their customers. Factors include: - The character of the market for the security - The size and type of the transaction and number of markets checked - The ease of obtaining a quote and the terms of the order

Answer 753

Insider trading involves the purchase or sale of securities using material, non-public information about an issuer to make a profit or avoid a loss. 1. TIPPERS AND TIPPEES - Refers to inside information passed from one party (tipper) to another (tippee) who then trades on that information - If trading occurs, both parties would be in violation 2. PROCEDURES - Broker-dealers must have written policies designed to prevent insider trading. These must include: - A system to monitor an employee’s personal trading - The establishment of information barriers to prevent access to confidential information - Trading restrictions or monitoring of certain securities on which the firm has access to inside information - Restricted list – distributed to employees - Watch list – only known to legal and compliance 3. INSIDER TRADING PENALTIES - Civil – The SEC may demand disgorgement of profits and the payment of treble damages (three times the damage) - Criminal – An individual may be subject to a maximum fine of $5 million, and/or up to 20 years in prison 4. BOUNTIES - Eligible whistleblowers are entitled to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and other regulatory authorities.

Answer 754

Trading on the secondary market that is monitored by the designated market maker.

Answer 755

NASDAQ (a dealer-to-dealer exchange) ECNs/Dark Pools (you do not see quotations) OTC Pink Markets

Answer 756

Over-the-counter (OTC)

Answer 757

SIPC, a non-profit membership corporation (not a government agency). It protects Separate customers (not accounts) if B/D bankruptcy occurs: - Separate customers include IRAs, as well as joint and custodial accounts - Separate coverage provided for accounts that are held at different firms Cash and street name securities: $500,000 - Will only cover cash up to: $250,000 If limits are exceeded, customer becomes a: General Creditor Fraud is not covered (covered by fidelity bond), futures contracts, commodities, and fixed annuities.

Answer 758

Self Regulatory Organization: Conduct Rules: Governs the interaction between customers and firms Uniform Practice Code (UPC): Standardizes the procedures for doing business in financial markets Code of Procedure (COP): Establishes the process used to discipline any person who violates FINRA rules Code of Authorization: Provides the method for resolving disputes (typically monetary) between members, including those that involve public customers.

Answer 759

Senior to equities. They rank higher than equities. You have to pay your bonds before paying dividends for securities.

Answer 760

Preferred and Common stocks

Answer 761

OTC market (OTC Pink Market)

Answer 762

Treasury stock. They will do this if a company is sitting on a lot of cash. They will buy it back to increase their equity and reduce cost. Common Stock!

Answer 763

U.S. exchanges (Nasdaq or NYSE)

Answer 764

Callable is preferred stock and Treasury is common stock.

Answer 765

Special types of investments that track the value of common stock or another underlying asset. allows securities to purchase a specific number of the company's common (stock) shares: - Exercise price is set at issuance - Provide upside if stock appreciates - Tradable Rights: - Issued to shareholders - Short-term - Immediate discount Warrants: - Attached to a new issue - Long-term - Initial Premium

Answer 766

A company can issue warrants on their own or attach the warrants to a bond. Warrants give the holders the ability to buy the issuer's common stock at a specified price (subscription price) in the future.

Answer 767

No, they are creditors who receive interest payments

Answer 768

Unsecured bond

Answer 769

They are callable.

Answer 770

Annual interest divided by current market price 8% ($80) nominal yield with a $1k price is what? $80/$1000 = 8%

Answer 771

A corporation (sometimes a trust) that invests the pooled funds of investors; typically into a diversified portfolio of securities.

Answer 772

Net Asset Value (NAV) is synonymous with the bid price or redemption (liquidation) price for mutual fund shares. Investors who redeem their shares receive the next computed NAV (forward pricing) POP is the NAV plus any applicable sales charges: Calculating the NAV per share: (total assets - total liabilities) divided by number of shares outstanding

Answer 773

(POP - NAV) divided by POP = Example: NAV (BID) = 9.20 POP (ASK) = 10 (10-9.20) divided by 10 = .8/10 = 8%

Answer 774

Amount deducted from an investor’s purchase  Benefits the selling brokers  Used to cover the costs of promotion and sales literature * Industry rules prohibit assessing charges in excess of 8.5% of the POP

Answer 775

An annual fee levied against the fund's assets (allows distribtuion costs to be borne by the fund, rather than from front-end charges) Used to finance promotion, advertising, sales commissions. 12b-1 fees are not used to cover commissions on portfolio transactions

Answer 776

Front-end load. Breakpoints available for large purchases.

Answer 777

A shares, in 6 to 8 years. No breakpoint available

Answer 778

have no sales charges and may only charge annual 12b-1 fees up to 1/4 of 1% (25bp)

Answer 779

- When investing an amount at or above the breakpoint, the investor qualifies for the lower sales charge on the entire purchase - Purchases of multiple funds within the same family or complex of funds are consolidated to determine the sales charge You can complete an LOI (letter of intent): A non-binding provision that gives investors additional time to qualify for a breakpoint * 13-month time period * May be back dated 90 days ROA (Rights of Accumulation) is the right to add up all purchases made from same family of funds. When a breakpoint is crossed , current and future purchases will have a lower sales charge.

Answer 780

- The greater of: - The total contributions made or the - Current value of the contract - Amount above cost basis could be taxable

Answer 781

Pay-in Period (deposit phase), During this phase the account is value in terms of "accumulation units."

Answer 782

Pay-out, withdrawal, or annuitization phase, Receiving benefits at annuitization, accumulation units are covered into a fixed number of annuity units Unit Value is based on: - Age and Gender - Life expectancy - Payout option selected - Value of the separate account - Payout is established by multiplying the fixed number of annuity units by the fluctuating value.

Answer 783

D. Increase by 3.75% Since the ETF is leveraged, the movement will be equal to the leverage factor multiplied by the change in the index. In this case, the ETF is leveraged by a factor of 3x the change in the index. Therefore, the result is that the value of the ETF is expected to increase by 3.75% (3 x 1.25%).

Answer 784

Out-of-the-money and at-the-money The concept of INtrinsic value is ties to options that are IN-the-money.

Answer 785

intrinsic value (the amount by which an option is in-the-money) + time value (The portion of an options premium that exceeds its intrinsic value).

Answer 786

1. Expire Worth Less: If an option is at- or out-of-themoney on the expiration date, the holder of the contract has no incentive to exercise the contract. The contract expires worthless. The expiration triggers: - The maximum profit for a seller of a call or put - The maximum loss for the buyer of a call or put 2. Exercised: The investor who is long an option has the exclusive right to exercise the option at his own discretion. The two styles of exercise are: - American Style – options may be exercised at any time up until expiration - European Style – options may only be exercised on the day of expiration 3. Liquidated - Liquidating (closing out) an option position is essentially an alternative to exercising the option. The investor executes an opposite transaction on the same series of option. In other words, what was bought is sold or what was sold is bought.

Answer 787

B. $79.25 The formula for finding the breakeven point for a call option is the strike price PLUS the premium. This is true for both buyers and sellers of call options. For this question, RST stock may be trading at 79.25 (75 + 4.25) for the investor to breakeven. Although the investor wants the stock to decline, if it rises by 4.25 points above the strike price, the investor will simply be giving back the amount that was received for selling the option (i.e., the investor will breakeven).

Answer 788

When long stock: Buy a put * If the stock decreases, the gain on the put can offset the loss on the stock  When short stock: Buy a call * If the stock increases, the gain on the call can offset the loss on the stock Buying options can be an effective hedge for either long or short stock positions

Answer 789

B. Falls below the exercise price minus the premium paid The buyer of a put option will profit if the market price drops below the breakeven price. The formula for calculating a put's breakeven price is the strike price minus the premium (Put Breakeven = Strike - Premium). For example, if an investor buys a XYZ July 50 put for 5, the breakeven is $45 ($50 strike - $5 premium). In this case, the stock's price would need to fall below $45 for the buyer to profit. The formula for calculating the breakeven price for a call is the strike price plus the premium (Call Breakeven = Strike + Premium). (74028)

Answer 790

C. Intrinsic value of 4 and a time value of 2 Calls are in-the-money and have intrinsic value if the market price of the underlying stock is higher than the strike price (i.e., call-up). Since the underlying stock was at $74 and the strike price was 70, the option was in-the-money and had intrinsic value of $4 ($74 market - $70 strike). Time value is the remainder of the premium after the intrinsic value is deducted. In this question, the time value is $2 ($6 total premium - $4 intrinsic value).

Answer 791

The premium is $6 and you will need to subtract the intrinsic value. The call was at $70 and now it is at $74. It has an intrinsic value of 4. $74 market - $70 strike

Answer 792

D. Unlimited The maximum gain for an investor who buys a call option is theoretically unlimited. This is due to the fact that the buyer of a call is bullish and a stock's upside is infinite. (14205)

Answer 793

D. $63 The formula for finding the breakeven point for a call option is the strike price PLUS the premium. This is true for both buyers and sellers of call options. For this question, ABC stock must be trading at 63 (60 + 3) for the investor to breakeven. If the stock rises by 3 points above the strike price, the bullish investor will gain back the amount that was paid to purchase the option (i.e., the investor will breakeven).

Answer 794

B. Bearish An investor who buys a put option is bearish (i.e., wants the underlying stock to fall). On the other hand, an investor who sells a put option is bullish (i.e., wants the underlying stock to rise). (14213)

Answer 795

C. $375 loss The investor received the premium of $425 for selling the call. When the position is later closed out, it means that the investor will take the opposite position from the original position. In other words, she will buy the option to close out the position. With the stock at 83, the 75 call has intrinsic value of 8 (i.e., it's in-the-money by 8). Therefore, she buys the call for $800 and realizes a loss of $375 ($425 received - $800 paid out). (14212)

Answer 796

A. $300 The maximum loss for an investor who buys a call option is the premium paid. For this question, the investor's maximum loss is $300 (premium of 3 x 100 shares). Remember, buyers of options cannot lose more than the premium paid, which is realized if the option expires unexercised. (14206)

Answer 797

A. Closing sale An opening purchase transaction (i.e., a long position) is liquidated by selling the same option. More specifically, the order needs to be marked as a "closing sale." On the other hand, if an investor writes an option (i.e., makes an opening sale), it can be offset through a closing purchase. (74189)

Answer 798

C. $1,000 gain When the buyer of the call exercises the contract and buys the underlying stock, her cost basis to acquire the stock is $63 (60 + 3). If she later sells the stock at $73, she will realize a gain of $1,000. Put another way, the stock rose and was sold at a price that was 10 points beyond the breakeven point of 63. (14207) or the way I thought about it: $73 (current market price) - $60 (call option) = $1300 (100 shares x $13). $1300 - $300 (premium paid, 3x100shares) = $1000 in gain.

Answer 799

B. The purchaser limits the amount of money he could lose if the underlying stock declines. f an option expires unexercised, the maximum loss for the buyer of a call or put option is the premium paid. The purchaser of a call option has the right to buy stock at the option's strike price and will profit if the underlying stock increases in value (i.e., the buyer is bullish). Option buyers can profit by either exercising the option or by liquidating their positions. The writer (seller) of a call option has an obligation to sell stock if the option is exercised.

Answer 800

B. $1,300 Selling (i.e., writing) puts is a bullish position which means that the investor will lose if the market price of the stock falls. The lowest price to which XYZ stock can fall is zero. If XYZ is trading at $0 and the put is exercised, the writer will be obligated to buy 100 shares of XYZ at the strike price of $15, thereby paying a total of $1,500 ($15 x 100 shares). Since the stock he acquires is worthless, the put writer will lose his entire $1,500 investment. However, since the writer of the put had received the premium of $2 per share ($200 total), his maximum loss is $1,300 ($1,500 loss on stock - $200 premium received). (73750)

Answer 801

C. The stock's purchase price minus the call's premium For a covered call (long stock and short call), the maximum loss is the purchase price of the stock minus the premium received for selling the call. For example, if a client buys the stock at $34 per share and writes a 40 call for a premium of 2, the maximum loss is $32 per share ($34 purchase price - $2 premium). Without the short call, the investor would lose the entire $34 per share. However, with the covered call, the $200 premium received minimizes the loss. This is the reason why covered call writing is considered a partial hedge. The investor's only protection against downside risk is the amount of the premium received. To protect (or hedge) stock in a volatile market: - When long stock: Buy a put * If the stock decreases, the gain on the put can offset the loss on the stock - When short stock: Buy a call * If the stock increases, the gain on the call can offset the loss on the stock

Answer 802

A. $425 The maximum gain for the seller of an option is the premium received. If RST stock remains at or below the strike price of 75, the option will expire worthless and the seller will keep the premium received of $425. This amount is the seller's maximum gain.

Answer 803

B. Is obligated to purchase 100 shares of ABC stock When a put option is exercised, the writer is obligated to purchase 100 shares of the underlying stock. Index options, unlike equity options, require the writer to deliver cash equal to the option's in-the-money amount (i.e., its intrinsic value).

Answer 804

C. $74 The breakeven point for a call option is the strike price plus the premium (Call Breakeven = Strike Price + Premium). In this question, the breakeven point is $74 ($70 strike price + $4 premium). The fact that the investor bought multiple contracts is irrelevant since the breakeven point is a price per share. The buyer of a call wants the market price of the underlying stock to rise above the breakeven point (i.e., buyers of calls are bullish), while the seller of calls wants the price of the underlying stock to fall below the breakeven price (i.e., sellers of calls are bearish). It's important to note that the breakeven on call options is the same for both the buyer and seller (i.e., strike price plus the premium). (73747)

Answer 805

B. Bearish An investor who sells a call option is bearish (i.e., wants the underlying stock to fall). On the other hand, an investor who buys a call option is bullish (i.e., wants the underlying stock to rise).

Answer 806

A. Write covered calls Of the choices available, the most conservative strategy for increasing income in a portfolio is writing covered calls. The premiums received from the sale of the calls will increase the yield on the investor's portfolio of stocks.

Answer 807

C. $450 gain When the buyer of the put exercises the contract, he's exercising his right to sell the underlying stock at the strike price. However, he must first buy the stock at the market price of $27 to be able to then sell the shares at $35. This results in a profit of 8 points (or $800), but is reduced by the premium paid of $350. Therefore, the investor's result is a gain of $450 ($800 - $350). (14217)

Answer 808

B. Short the call, and long the stock

Answer 809

D. 10:59 p.m. Central Time (11:59 p.m. Eastern Time) on the third Friday of the expiration month Options expire at 10:59 p.m. Central Time (which is 11:59 p.m. Eastern Time) on the third Friday of the expiration month (July, in this question). Options trading stops at 3:00 p.m. Central Time (which is 4:00 p.m. Eastern Time) on the third Friday of the expiration month. The Options Clearing Corporation will accept an exercise notice up to 4:30 p.m. Central Time (which is 5:30 p.m. Eastern Time) on the day of expiration. (71943)

Answer 810

B. $200 Put options are in-the-money if the market price of the underlying security is below the option's strike price (i.e., put down). Since XYZ is trading at $38 and the put's strike is 40, the put is $2 in-the-money, which also represents its intrinsic value. Since equity options have a contract size of 100 shares, the intrinsic value equals $200 ($2 intrinsic value x 100 shares). The time value of an option is the total premium less the intrinsic value. With a total premium of $500 and intrinsic value of $200, the remainder is the time value of $300 ($500 premium - $200 intrinsic value).

Answer 811

B. Is obligated to purchase 100 shares of ABC stock When a put option is exercised, the writer is obligated to purchase 100 shares of the underlying stock. Index options, unlike equity options, require the writer to deliver cash equal to the option's in-the-money amount (i.e., its intrinsic value). Obligated to buy

Answer 812

Whistleblowers

Answer 813

The New Issue Rule! - Restricted Persons: * Member firms and any member firm employees * Immediate family members of member firm employees if: * There is material support (25% of the person’s income), or * Sharing of a household, or * The purchase is made through the family member’s firm * Finders and fiduciaries * Portfolio managers purchasing for their own account - Preconditions of Sales: * Verification that the account is eligible to purchase the IPO * May be a written statement or electronic communication * May not be an oral statement * Re-verification of eligibility every 12 months General Exemptions: * An account that includes restricted persons, provided their combined ownership does not exceed 10% (de minimis) * Issuer-directed sales that allow restricted persons to purchase if the associated person or associated person’s immediate family is an employee or director of the issuer * Portfolio managers purchasing for the mutual fund * A broker-dealer purchasing for its own account after making a bona fide public offering

Answer 814

False, Sharing in profits and losses in a client’s account is prohibited unless a joint account is established with the client and: * The employee has the written permission of both the client and the broker-dealer, and * The sharing is proportionate to the employee’s investment * An arrangement with a family member is exempt from the proportionate sharing requirement. Investment advisory accounts permit sharing in profits and losses if: * Prior written consent between the firm and customer * Firm is in compliance with SEC regulations Guarantees – employees may neither guarantee against losses nor reimburse a customer for losses in any way.

Answer 815

B. Secondary market sales by all broker-dealers Regulation M focusses on the new issue market and the activities of underwriters during the underwriting period. Reg M is only concerned with the secondary market trading of securities that are associated with a new issue.

Answer 816

Office of Supervisory Jurisdiction

Answer 817

B. This must be disclosed on the person's Form U4. Disclosure or updating a Form U4 is required if a person has been charged with, indicted or convicted of, or pleaded guilty to, or pleaded no contest to, any felony, or misdemeanor involving investments or an investment-related business, or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses. If a person has been indicted, he has been charged with a crime. This is a reporting event and requires that an updated Form U4 be filed within 30 days. (18797)

Answer 818

Gross Domestic Product (GDP): A measurement of the output of goods and services produced within the U.S. (disregards origin of producer): - Key measure of aggregate economic activity

Answer 819

Consumer Price Index (CPI): Measures the change in prices of goods purchased by a typical consumer - Key measure of inflation

Answer 820

(prices going up) “Too much money chasing too few goods” - Leads to a rise in prices of goods and services - High inflation usually accompanies high interest rates More demand than supply. Federal Reserve Board wants to try and control inflation.

Answer 821

A general decline in prices, often caused by a reduction in the supply of money or credit - Interest rates trend downward Not to be confused with Disinflation. (The inflation rate is coming down)

Answer 822

1. Expansion - business activity is growing, production and demand are increasing, and employment is expanding. At this point, businesses and consumers normally borrow money to expand, which causes interest rates to rise (inflation may begin to occur here, with the FRB then responding with a "Tight Money" Policy. 2. Peak - Demand for goods begin to overtake supply. Since consumers have a large amount of available funds to use for pursuing a limited amount of goods, prices begin to rise, thereby creating inflation. With the increasing cost of products, the consumer's purchasing power is reduced. 3. Contraction (recession) - As prices rise, demand diminishes and economic activity begins to decrease. At this point the cycle then enters the contraction (recession) phase. As business activity contracts, employers lay off workers and unemployment increases. This usually causes the rate at which prices are rising (inflation) to decline (disinflation). In real terms, the situation in which prices are falling is referred to as deflation. (The FRB pursues an "easy money" policy to stop the contraction.) 4. Trough - The cycle finally enters the trough at the bottom of the economy's decline. Lower prices will eventually stimulate demand and cause the economy to move into a renewed period of expansion that's referred to as a recovery.

Answer 823

2 consecutive quarters of a contracting economy.

Answer 824

Economists use these three types of indicators that provide monthly data on the movement (to forecast) of the economy as the business cycle enters its different phases. 1. Leading Economic Indicators (forecast where the business cycle is headed) - -*Building permits, private housing units - *Manufacturers’ new orders, consumer goods, non-defense capital goods - *S & P 500 Index (officially recognized to measure the stock prices) - Initial claims for unemployment insurance - Interest rate spreads, 10-year T-bonds less federal funds 2. Coincident Economic Indicators (tend to move with the business cycle) - - *The Index of Industrial Production - Employees on non-agricultural payrolls - Personal income less transfer payments 3. Lagging Economic Indicators (tend to move after the business cycle) - - Change in the Consumer Price Index for services - Average prime rate charged by banks - Average duration of unemployment

Answer 825

- Prime Rate: The rate charged by commercial banks to their best corporate clients - Discount Rate: The rate charged by the FRB when a member bank borrows from it - Federal Funds Rate: The rate charged on an overnight loan of reserves between member banks - Call Money Rate: The rate charged by commercial banks on collateralized loans to broker-dealers From lowest to highest the usually order of these rates are: Fed fund rate, discount rate, call money rate, and prime rate.

Answer 826

- Cyclical: Performance tends to run parallel to changes in the economy: - Includes machine tool companies, construction firms, transportation and automotive - These tend to do well during the EXPANSION PHASE of the business cycle - Defensive: Have smaller reactions to changes in the economy: - Examples include utility, tobacco, alcohol, cosmetic, pharmaceutical and food companies - These tend to do better during contraction - Growth: Companies whose sales and earnings are growing at a faster rate than the economy: - They reinvest most of their earnings and pay little or no dividends - Tend to be riskier than other stocks, but offer greater potential for appreciation - Value: Stocks that trade at lower prices relative to the issuing company’s fundamentals: - The risk is that investors may ignore these companies - Investors who buy value stocks are considered contrarians

Answer 827

The value of all the shares outstanding in the company (outstanding shares and multiply by the price pershare =market cap) Classifying stocks by market cap: Nano-cap: Below $50 Million Micro-cap: Between $50 million and $300 million Small-cap: Between $300 million and $2 billion Mid-cap: Between $2 billion and $10 billion Large-cap: More than $10 billion

Answer 828

(Listed from the least to the most used) - Regulation T: Extension of credit by broker-dealers - Discount Rate: The only rate that’s directly controlled by the Fed (the rate the fed charges banks) - Reserve Requirement: Amount of money that a bank must maintain based on a percentage of deposits (banks cannot lend out 100% of their reserve, they have to keep a percentage) - Federal Open Market Committee (FOMC): Trades U.S. Treasuries through “primary government dealers”

Answer 829

- To increase money supply and ease credit: The FOMC will "Buy securities (treasuries) and engage in Repos." This will be an easing - This will cause deposits and reserves to INCREASE. - To decrease money supply and tighten credit: The FOMC will "Sell securities and engage in Reverse Repos. This will cause a tightening. - This will cause deposits and reserves to DECREASE. *The goal of these actions is to influence the fed funds rate.*

Answer 830

Interest Rates: - An inverse relationship exists between the U.S. dollar and foreign currencies - Rising interest rates in U.S. will normally be accompanied by a strengthening of the dollar in relation to other currencies Balance of Trade - System of recording all of a country’s economic transactions with the rest of the world over a specific period * Favorable balance of trade: − A decline in the dollar (relative to other currencies) − When the U.S. exports more than it imports * Unfavorable balance of trade − An increase in the dollar (relative to other currencies) − When the U.S. imports more than it exports

Answer 831

Total assets = total liabilities + shareholders' equity

Answer 832

Revenue (Sales) − Cost of Goods Sold Gross Profit − Operating Expenses (SG&A, D&A) Operating Income + Other Income or Expenses Earnings Before Interest and Taxes (EBIT) −Interest Taxable Income −Taxes = Net Income or Loss

Answer 833

C. Matched sale A reverse repurchase agreement (repo) is referred to as a matched sale. Reverse repos occurs when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This has the short-term effect of absorbing (i.e., removing) funds from the money supply. (72408)

Answer 834

C. The discount rate The federal funds rate is the rate that one bank charges another bank when loaning excess reserves and is the most sensitive of all interest rates. The federal funds rate affects bond prices and other market interest rates. Unlike most interest rates, the discount rate is directly set by the Federal Reserve Board rather than in the lending markets. The discount rate only changes when the Fed's Governors vote to change it.

Answer 835

C. Discount rate Member banks can borrow money from the Fed at the discount rate. (72467)

Answer 836

D. Brewery Leisure (e.g., resorts, airlines), industrial equipment, and auto industries are all cyclical. Cyclical stocks tend to rise and fall rapidly with changes in the economy. Defensive stocks, such as stocks of brewery, tobacco, and utility companies, are not as directly influenced by changes in the economy. (72455)

Answer 837

A. Open market operations Of all of the FRB tools listed, the one most commonly used is open market operations. This is the most flexible tool and can be changed or fine-tuned very easily by buying or selling more or fewer U.S. government securities in the open market. The other choices are not as flexible, but are used to implement FRB policy. The margin requirement is another tool the FRB can use, but the margin requirement is the least likely tool that the FRB will use since it only affects a small segment of the economy. (72405)

Answer 838

C. New U.S. investments abroad New U.S. investments abroad will increase the basic deficit in the U.S. balance of payments. This is because dollars are leaving the U.S. for investments in foreign countries. New foreign investments in the U.S. will have a positive effect on the U.S. balance of payments. (72381)

Answer 839

A. Slope upward from the shorter to the longer maturities During periods of easy money when interest rates are declining, yields on shorter maturities fall faster than those of longer maturities. As a result, short-term yields will be lower than long-term yields. This is referred to as a positive yield curve since it slopes upward from the shorter to longer maturities. (72396)

Answer 840

A. The average rate charged on overnight loans throughout the country increased The effective federal funds rate is the daily average rate that commercial banks charge throughout the country for overnight loans. The fed funds rate is influenced, but not set by, the Federal Reserve Board. An increase in the federal funds rate typically signifies that the Fed has taken money out of the banking system in an attempt to increase interest rates. (72422)

Answer 841

D. The federal funds rate Yields and rates on short-term loans and securities are the most volatile. The federal funds rate, which is the rate of interest one bank charges another bank for the use of excess reserves on overnight loans, fluctuates the most since it has the shortest maturity. (72379)

Answer 842

Systematic risks are those that affect the value of all securities and cannot be avoided through diversification, including: - Market Risk: Risk inherent in all securities due to market fluctuation -Interest-Rate Risk: Risk that the value of a fixed income investment (bond) will decline due to a rise in interest rates - Inflation Risk: Risk that an asset or the purchasing power of income may decline over time, due to the shrinking value of the country’s currency - To find a bond’s REAL INTEREST RATE (or the real rate of return), the formula is: Nominal Yield – Inflation Rate= real interest rate - Event Risk: Risk that a significant event will cause a substantial decline in the market

Answer 843

Beta: Beta measures the volatility of an asset (typically an equity) relative to the entire market - A stock’s beta is compared to the beta of the S&P 500, which is always 1.00 - If a stock’s beta is more than 1, it’s expected to outperform when the market is up and underperform when the market is down - If a stock’s beta is less than 1, it’s expected to underperform when the market is up and outperform when the market is down

Answer 844

Fixed income investors (bondholders) are most affected by interest-rate risk - Rising interest rates result in falling bond prices * Cannot be avoided by diversifying * Long-term debt is more vulnerable than short-term debt * Duration is used to measure the change in a bond’s price based on a given change in interest rates − Measured in terms of years; the higher the duration, the higher the risk - Equities of highly leveraged companies (e.g., utilities) and preferred stocks are susceptible to interest-rate risk

Answer 845

Inflation risk (purchasing power risk), also referred to as purchasing power risk, is most detrimental to investments that offer fixed payments - Inflation leads to increasing interest rates, thereby causing fixed payment securities to fall in value - Rising prices diminishes the purchasing power of these same securities - Common stock, variable annuities, real estate, and precious metals tend to perform better during times of inflation *What is Inflation? Inflation occurs when there’s a continual increase in consumer prices or decline in a currency’s purchasing power, caused by an increase of currency and credit beyond the availability of goods and services.*

Answer 846

"Don't put all of your eggs in one basket." These risks are unique to a specific security and can managed through diversification: BUSINESS RISK: Risk that a company may perform poorly causing a decline in the value of the stock REGULATORY RISK: Risk that new regulations may have a negative impact on an investment’s value POLITICAL RISK: Risk that political event outside of the U.S. could adversely affect the domestic markets LIQUIDITY RISK: Stemming from a lack of marketability, this is risk that an investment cannot be bought or sold quickly enough to prevent or minimize a loss (DPPs or limited partnerships are illiquid

Answer 847

- Capital Risk: Risk of investors losing their invested capital (lower for bonds) - CREDIT RISK: Risk that a bond may not repay its obligation - CURRENCY RISK: Risk of loss when converting an investment that’s made in a foreign currency into U.S. dollars - LEGISLATIVE RISK: Risk that new laws may have a negative impact on an investment’s value (e.g., tax code changes) - OPPORTUNITY RISK: Risk of passing on the opportunity of making a higher return on another investment - REINVESTMENT RISK: Risk that interest rates will fall and semiannual coupons will be reinvested at a lower rate (risk of lower interest rate) - PREPAYMENT RISK: Risk that mortgages will be paid off early due to lower interest rates, resulting in reinvestment in lower yielding investments

Answer 848

Asset allocation focuses on a portfolio constructed of various asset classes. An optimal portfolio (one producing the greatest return for a given amount of risk) is based on a client’s goals, expected return, and risk tolerance Asset Classes: - Equities - Alternative Investments (real estate) - Fixed Income - Cash

Answer 849

Assumes that markets are efficient and creating an optimal portfolio requires allocating assets based on a client’s risk tolerance and investment objectives - Buy-and-Hold (do nothing): - Minimizes transaction costs and tax consequences - However, the asset mix of the portfolio may drift over time - Indexing: - Maintaining investments in companies that are part of major stock (or bond) indexes - Infrequent rebalancing - (S&P 500 for example) - Systematic Rebalancing: - Involves buying and selling assets on a periodic basis - More frequent rebalancing keeps the portfolio closer to its strategic allocation - May result in higher transaction costs as well as tax consequences

Answer 850

Assumes that markets are inefficient Involves altering the asset mix in anticipation of changing economic conditions/events (market timing) - Sector Rotation is one example * Money is moved from one industry or sector to another in an attempt to beat the market * A portfolio manager who employs a sector rotation strategy will try to anticipate the next turn in the business cycle and shift assets into the sectors that will benefit

Answer 851

Involves making the same periodic investment regardless of share price over a fixed period of time - Investors will purchase more shares when price is low and fewer shares when price is high - Advantage: * Results in the average cost of shares being less than their average price Example: Let's say you will invest $1000 of shares every quarter no matter what happens to the price your average cost of the share is less than their average price *With dollar cost averaging, the good news is that: - When share prices are up, the previously purchased shares are worth more - When share prices are down, the investor will be able to purchase more shares at a lower price*

Answer 852

Options are popular investments to use as a hedge (protection): - Equity options can protect individual stocks - Index options can protect an entire portfolio - Currency options can protect against exchange-rate risk * To hedge the U.S. dollar, investors must take the opposite position on the currency option If an investor anticipates an increase, in the underlying asset’s value, but fears a decrease, he should: - If an investor anticipates a decrease, in the underlying asset’s value, but fears an increase, he should: -

Answer 853

D. Have more liquidity risk than listed stocks Over-the-counter (OTC) markets are less liquid than SEC-registered stock exchanges. As a result, OTC stocks have more liquidity risk than listed stocks. Regulatory risk can come from any regulator. An OTC stock in a heavily regulated industry could have more regulatory risk than a listed company in a deregulated industry. (14384)

Answer 854

B. Bonds Capital risk is the risk of an investor losing her entire investment. When compared to the other securities, bonds have the least amount of capital risk because they're paid first in bankruptcy. Stocks have more capital risk since they're paid after bondholders in a bankruptcy. Warrants and options have the most capital risk. Even if the issuing company has not declared bankruptcy, if a warrant or option expires out-of-the-money, an investor will lose her entire investment. (72657)

Answer 855

C. Interest-rate risk Interest-rate risk is a systematic risk and cannot be diversified. Investors that buy a large, diversified portfolio of bonds can mitigate risks of businesses, credit issues, and liquidity. (12697)

Answer 856

B. A 30-year Treasury STRIP Bonds with longer maturities and the lowest coupons have the most interest-rate risk. A zero-coupon bond with the same maturity as a bond that pays interest will have more interest-rate risk. Treasury STRIP are a form of zero-coupon bond and a 30-year STRIP will have more interest-rate risk than a 30-year T-bond that has a coupon. (72712)

Answer 857

C. Treasury notes Credit risk relates to the ability of an issuer to pay interest and principal. Since Treasury notes are secured by the full faith and credit of the U.S. government, they don't have credit risk. A revenue bond is a type of municipal bond that will default if the project fails to generate enough revenue. Revenue bonds typically have more credit risk than general obligation bonds that are issued by the same municipality. Mortgage bonds are corporate bonds that are secured by real estate owned by the issuer. Although they have less credit risk than debentures (i.e., unsecured bonds), they do have more credit risk than Treasuries. In the event of corporate bankruptcy, since stockholders are paid after bondholders, the preferred stock has more credit risk than the other choices. (72971)

Answer 858

D. Sector rotation Sector rotation is an active management approach and is based on the belief that markets are inefficient. Indexing, buy and hold, and systematic rebalancing are all passive strategies based on the Efficient Market Hypothesis. (14396)

Answer 859

B. Buy calls To reduce the risk of a short stock position, the investor could buy calls on the underlying stock. By purchasing calls, the investor will have the right to buy the stock if the stock rises in value. By purchasing the shares, the investor will be able to replace the shares that were borrowed and sold short.

Answer 860

B. Send a prospective client an account opening form Unregistered employees of a brokerage firm are permitted to send potential customers account forms and also invitations to brokerage sponsored events. However, unregistered employees are prohibited from accepting orders, talking to customers about objectives, or explaining financial products to either existing or prospective customers.

Answer 861

D. A BB-rated corporate debenture maturing in two years Interest-rate risk is primarily related to the maturity of a bond. The longer the bond's maturity, the more interest-rate risk it has. In this case, the two-year debenture has the least interest-rate risk because it has the shortest maturity. A bond's rating influences its credit risk, not its interest-rate risk. (37484)

Answer 862

A. $25 Bonds pay interest every six months (semiannually). The dollar amount of interest payments is computed as a percentage of the par value. In this example, the coupon rate is 5%. The annual interest payment is $50 (5% of $1,000 par value). Each interest payment is one-half of that amount, or $25.00.

Answer 863

A. A client's number of annuity units never changes During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.

Answer 864

B. 4.26% The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant. (73540)

Answer 865

A. Limited partnerships Regulatory risk is the possibility that changes in regulations can have an adverse impact on the value of investments. This is very similar to legislative risk, which is the risk associated with changes in laws. Although all kinds of investments can be subject to regulatory and legislative risk, limited partnerships have historically been particularly vulnerable. For example, adverse changes in the tax laws can cause the value of many limited partnerships to decline.

Answer 866

C. Form U6 Form U6 is used to report disciplinary actions against RR's and firms as well as final arbitration awards against individuals or firms. Form U4 is filed with FINRA when a person is applying for securities registration. Form U5 is filed with FINRA when a person's registration is terminated. Form BD is filed by brokerage firms to register with FINRA, the SEC, and states. (37301)

Answer 867

C. $100 MSRB rules regarding gifts are similar to FINRA rules in that the maximum gift is $100 per year. (13453)

Answer 868

B. A closed-end fund A closed-end fund makes no provision for future purchases or redemptions from the issuing fund. Shares are bought and sold in the open market in the same manner as the common stock of corporations. All of the other types of funds listed do provide for future purchases to and redemptions from the fund.

Answer 869

D. The number of shares being issued A preliminary prospectus (i.e., red herring) can be used by an issuer of stocks and/or bonds during its cooling-off period. These documents typically have most of the information that's found in a final prospectus, including the number of shares being issued by the company, its business, financial statements, risk disclosures, and ownership structure. However, the SEC doesn't permit an issuer to include the effective date or a definitive public offering price (POP) in a preliminary prospectus. Instead, an issuer may include a price range for the offering (e.g., from $20 to $25) in the red herring. Since the securities have not yet been offered, there's no fee disclosure that's required.

Answer 870

A. He may be hired as a registered representative A convicted felon is barred from the securities business for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. Since the conviction was more than 10 years ago, the person may be hired as a registered representative. There are no special restrictions concerning registration and compensation of the person who was previously subject to statutory disqualification.

Answer 871

D. Control stock acquired through an open-market purchase There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period.

Answer 872

C. Annually Anti-money laundering (AML) rules ensure that executing (i.e., full service) broker-dealers are auditing and testing their internal procedures once per year (i.e., annually). Under the rules, broker-dealers must also ensure that their staff has been properly trained on the firm's AML procedures.

Answer 873

C. A law firm To be a trusted contact person for a senior investor, the only requirements are that the person must be a natural person (not a law firm) and be at least 18 years old.

Answer 874

B. They are designed to deliver a multiple of the performance of an index or other benchmark A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the DJIA seeks to deliver three times the performance of that index. So, if the DJIA rises or falls by 1%, a leveraged ETF would increase or decrease by 3% before fees and expenses. The other choices include a regular ETF which equals the performance, an inverse ETF which seeks to deliver the opposite of what it is tracking, and a leveraged inverse ETF designed to deliver a multiple of the opposite direction. (32295)

Answer 875

B. High dividend payout ratio Growth companies will normally retain most of their earnings to enable them to continue their growth. They would typically have low dividend payout ratios, high research and development expenses, and high price/earnings ratios, as well as a wide trading range for the stock.

Answer 876

A. The issuer Although assistance may be provided by others, the issuer is ultimately responsible for creating the official statement. If created, the underwriting syndicate is responsible for providing the official statement to investors who purchase the new offering.

Answer 877

C. Proceeds in excess of cost are taxable as ordinary income to the beneficiary. When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.

Answer 878

B. $955.62 U.S. Treasury bonds are quoted in full points and 32nds of a point. A T-bond quote of 95.18 represents 95 18/32. By converting the fraction to a decimal, the quote becomes 95.5625 percent of the par value of $1,000. $1,000 x 95.5625% = $955.62.

Answer 879

B. They can be used by investors who want to trade anonymously. Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.

Answer 880

A. It protects customers in the event their broker-dealer goes bankrupt. A fidelity bond does not protect customers in the event of broker-dealer bankruptcy; that's the role of SIPC. Instead, a fidelity bond is insurance that protects a broker-dealer in case of fraud such as forgery or counterfeit currency. The bond covers securities that are held at the brokerage firm as well as those in transit. FINRA must be notified if the bond is cancelled or substantially modified.

Answer 881

B. An accredited investor Accredited investors have a net worth of $1 million (excluding their primary residence) or annual income of $200,000 in each of the last two years. For married couples to be considered an accredited investor, they need to have income of at least $300,000. A qualified institutional buyer (QIB) must be institution with $100 million in assets under management (AUM), but is NOT a natural person.

Answer 882

D. Prohibited, fraudulent, and manipulative This question relates to a tie-in arrangement, which may be used to artificially increase the price of a stock in the secondary market. These prearranged purchases are prohibited because they're manipulative and harm other market participants. Underwriters are prohibited from prearranging purchase orders which guarantee the clients a profit (i.e., buying shares back at a price that's equal to or higher than the POP).

Answer 883

B. Represents an undivided interest in a fixed account Unit investment trusts (UITs) sell shares of beneficial interest (SBIs) that represent an undivided interest in a fixed portfolio of securities. UITs typically assess an initial sales charge (load) along with operating fees. Since UITs are non-managed investment companies, they don't include management fees.

Answer 884

B. Ex-date The ex-date is the first day that a stock trades without its dividend included in its price. On the ex-date, the stock's price is reduced by the amount of (or enough to cover) the dividend.

Answer 885

D. $1,057.50 U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price: Step 1: 105.24 is equal to 105 24/32 Step 2: convert 24/32 into a decimal, which is .75 Step 3: convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay $1,057.50.

Answer 886

A. Does not require the firm to deliver a prospectus If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there's no aftermarket prospectus delivery requirement for dealers. An issuer that's listed on the NYSE or Nasdaq is required to file reports with the SEC (a reporting issuer). If the issuer was filing for an IPO (a non-reporting issuer) and the securities will be subsequently listed on the NYSE or Nasdaq, the firm is required to deliver a prospectus to any purchaser in the aftermarket within 25 days of the effective date.

Answer 887

A. 5.30% The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond's yield will be the same as the coupon rate, which is 5.30%.

Answer 888

A. First two years The SEC rules regarding record retention generally require that records be kept in an easily accessible location for the first two years. Records must generally be kept in total for either three years, six years, or the life of the firm depending on the specific record.

Answer 889

D. The withdrawals may result in a reduction of capital. The only true statement is that the plan may result in the reduction of capital if the dividends and capital gains that are generated from the fund are NOT sufficient to make the payments and because the shares will need to eventually be redeemed to make payments. Systematic withdrawal plans provide an investor with regular payments. These payments can be structured as fixed-dollar, fixed-percentage, or fixed-time. The option chosen determines whether the payments will remain the same or whether they will cease on a specific date. Payments will first come from dividends and capital gains that are generated from the fund, but after those funds are no longer sufficient, shares will be redeemed to provide the payments.

Answer 890

B. Must register under the Investment Company Act of 1940 if offered to U.S. residents Hedge funds are investments that resemble mutual funds, but are typically only offered to wealthy investors. Hedge funds often employ aggressive financial strategies such as short selling, the use of leverage (borrowed funds), and placing large bets on individual companies or sectors of the market. These funds are not generally required to register with the SEC due to the accredited status of their investors.

Answer 891

D. Selling stock short An equity inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. Similarly, a customer who sells stock short is anticipating a decline in the price of the equity securities. For example, an inverse ETF that's based on the DJIA seeks to deliver the opposite performance of that index. Therefore, if the DJIA rises by 1%, an inverse ETF's value should decrease by 1%. Conversely, if the DJIA falls by 1%, the inverse ETF's value should increase by 1%. (37104)

Answer 892

C. An inverse exchange-traded fund (ETF) An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. An inverse ETF based on the S&P 500 Index seeks to deliver the opposite performance of that index. For example, if the S&P 500 rises by 1%, an inverse ETF would decrease by 1%, and if the S&P 500 falls by 1%, the inverse ETF would increase by 1% before fees and expenses are deducted. A leveraged exchange-traded fund (ETF) is suitable if the customer anticipates an increase in the S&P 500 and wants a multiple of that increase. A leveraged inverse exchange-traded fund (ETF) is suitable if the customer wants a return that is a multiple or higher return and anticipates a decrease in the S&P 500. An exchanged-traded fund (ETF) is suitable if the customer only wants to track the return of the S&P 500.

Answer 893

B. A mix of individuals who represent the public and financial industry When more than one arbitrator is involved in a case for a public customer, the panel consists of a mix of both public and industry arbitrators. However, for cases that only involve members of the industry, all of the arbitrators will be industry arbitrators. (17587)

Answer 894

C. Securities listed on an exchange, but traded in the OTC market The third market is concerned with securities that are listed on an exchange (e.g., the NYSE or Nasdaq) that are traded in the OTC market. The fourth market refers to direct institution-to-institution trading and does not involve the public markets or exchanges. (37522)

Answer 895

C. 20 To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($50). In this question, the conversion ratio is 20 ($1,000 ÷ $50). To calculate the conversion ratio, the market price of the bond is irrelevant.