Comprehensive Questions Flashcards

Question

All but which of the following are characteristics of a REIT? (A) It is a publicly traded open-end investment company. (B) A mortgage REIT is a specific type of REIT. (C) A REIT can sell at a premium or discount to its NAV. (D) All of the above are correct.

Answer 1

REITs are publicly traded closed-end investment companies that can sell at a premium or discount to its NAV. A mortgage REIT is a specific type of REIT.

Answer 2

Answer: C, An investor can sign a letter of intent (LOI) which allows him or her to receive breakpoint discounts based upon a commitment to buy a specified number of mutual fund shares over a period of time, usually 13 months.

Answer 3

The three types of state registration for securities are notification (filing), coordination, and qualification.

Answer 4

Since the issuer has treasury stock (repurchases stock), it is not an IPO. An IPO is an initial public offering and it is the first time a corporation ever issues securities. If this company that has already issued securities is only offering shares that have not previously been sold, it would be a primary offering. However, in this case, the issuer is selling 800,000 shares that have never been sold (primary) and 200,000 shares of treasury stock (secondary), so it is considered a combined or split offering

Answer 5

In a fixed exchange rate system, a country ties its currency to a basket of other currencies or to another measure of value, such as gold.

Answer 6

If money distributed from a 529 plan is not used to pay for qualifying education expenses, the gain is taxed as ordinary income and a 10% penalty is applied.

Answer 7

This one is tricky because they’re all exempt. Regulation D private placements and intrastate offerings are exempt based on the type of transactions. However, securities issued by the US government and commercial paper are exempt based on the type of security.

Answer 8

An investor who believes that an economic recession is imminent should purchase defensive stocks because they tend to outperform during economic downturns.

Answer 9

Since the holding period has been met, the maximum number of shares that can be sold by an insider under rule 144 is 1 percent of the outstanding shares or the average trading volume for the previous 4 weeks, whichever is great

Answer 10

Because they are growing and expanding, growth stocks typically do not pay large dividends. Most of the earnings generated from growth stocks are reinvested back into the company.

Answer 11

For IPOs (Initial Public Offerings), a final prospectus must be available to all purchasers of the IPO for 90 days after the effective date (the first day the security starts trading).

Answer 12

A clearing broker acts as a liaison between an investor and a clearing corporation by helping to ensure that trades are settled appropriately and transactions are successfully completed.

Answer 13

All of the choices listed would be in the preliminary prospectus (red herring) except for the final offering price. The offering price at this point has not been determined. The offering price as well as the underwriting spread and the delivery date would be included in the final prospectus.

Answer 14

Broker-dealers, investment advisers, and issuers of securities must fill out form U5 in order to terminate the registration of an individual in the appropriate jurisdiction. It is also known as the Uniform Termination Notice for Securities Industry Registration.

Answer 15

A sell stop order is an order to sell a stock at a price below the current market price

Answer 16

Regulation SHO was adopted to update short sale regulations and to address concerns regarding potentially abusive naked short selling.

Answer 17

The Securities Act of 1933 (Truth in Securities Act, Paper Act, Full Disclosure Act, Prospectus Act, or the New Issues Act) regulates new issues of corporate stocks and bonds. Included in the act are rules to prevent fraud and deception as well as rules about the issuer providing information about itself and the securities being offered.

Answer 18

Tombstone advertisements may or may not include the offering price — it depends on whether that has been decided yet.

Answer 19

Answer: D, FINRA, NYSE, and SIPC are self-regulatory organizations (SRO

Answer 20

The CBOE (Chicago Board Options Exchange) is the largest options exchange in the U.S. and focuses on options contracts for individual equities and indexes

Answer 21

The cooling-off period is when an issuer files a registration statement with the SEC. During this time, the SEC reviews the registration statement to see if it needs to be amended or if additional information is needed. It typically takes 20 days for the SEC to review the registration statement. As a matter of fact, it is sometimes referred to as the 20-day coolingoff period.

Answer 22

Real return = Nominal return – Inflation.

Answer 23

The Fourth Market The Primary Market is the first issuance of shares to public buyers, the Secondary Market is the trading after the IPO in the primary. The Third Market is shares listed in exchange in the OTC market and the Fourth Market is virtually the same as the Third Market but without an intermediary and therefore more discretion.

Answer 24

Both Serial & Balloon Bond A term bond has a set time for the bond to mature at once. A serial bond as intervals where portions of the principal are paid throughout. A balloon bond also can have part of the principal paid before the maturity date, but the majority is paid at maturity.

Answer 25

D. Front-running is the practice of trading for one’s own account in front of a large customer trade (for example a block trade of 10,000 or more shares), because you believe the order will impact the market price of the security. It is a form of insider trading.

Answer 26

C. The end of each year The regulatory element of continuing education requires that all registered persons complete a computer-based training session by the end of each year. The content of the regulatory element is determined and provided by FINRA and is appropriate to the class of registered representative or principal. If a person does not complete the regulatory element during the prescribed period, the person’s license will become inactive, and they will not be able to perform any of the activities that require registration, and they will not be compensated for any of those activities. Note that prior to 2023, a registered person was required to complete the regulatory element no later than 120 days after the second anniversary of their registration date and then every three years thereafter.

Answer 27

C. Treasury bonds Treasury bonds pay interest semiannually (twice a year). In contrast, Treasury bills are bought at a discount and redeemed for par value at maturity. STRIPS are long-term zero coupon bonds consisting of U.S. Treasury securities. As zero-coupon bonds, they are bought at a discount and then redeemed for par value at maturity. Finally, treasury stock is issued stock that is repurchased by the issuing company. It is not issued by the U.S. Treasury and pays neither dividends nor interest.

Answer 28

B. When the Fed buys and sells U.S. treasury bonds on the secondary market Open market operations is when the Fed buys and sells U.S. treasury bonds on the secondary market. Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). Historically, the Federal Reserve used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate--the interest rate at which depository institutions lend reserve balances to other depository institutions overnight--around the target established by the FOMC.

Answer 29

C A representative recommends the same security to all of their customers No investment is inherently suitable for all investors in all situations because suitability depends on each investor's unique situation and circumstances. The other choices raise no concerns.

Answer 30

C It is not acceptable RRs may not alter or modify the contents of a prospectus. RRs can send a prospectus electronically to a customer, with a return receipt requested.

Answer 31

D Investment pools available to local government entities that permit investment of public funds Local government investment pools (LGIPs) are investment pools that are established by state or local government entities to allow for the investment of public funds. The objectives of an LGIP are to provide a safe investment return and daily liquidity, like money market funds.

Answer 32

D An investor purchased 100 shares of stock at $40 per share and sells the shares for $50 per share When an investor sells an investment for more than its purchase price or their cost basis, they will have a realized gain. Unrealized gains, or paper gains, are the gains shown on the growth of an investment that is still held, but not sold. If the investor sells for less than their cost basis, they have a realized loss.

Answer 33

B Preemptive rights Stockholders have the right to maintain their proportionate share of the companies in which they are part owners. This is accomplished through preemptive rights (often just called rights), which are the ability to purchase any newly issued shares before they are offered to the public. These shares are available at the subscription price. The subscription price is below the current market price of the stock to give the stockholders further incentive to exercise their rights. The percentage of the new shares that the stockholder has the right to buy is the same percentage of the company that they currently own.

Answer 34

A Syndicate members and market makers The Securities Exchange Act of 1934 contains Regulation M rules established to control the activities of syndicate members and market makers that are participants in follow-on offerings. The concern is that these firms will attempt to manipulate the price of the security by buying or selling the subject security in the secondary market prior to the effective date of the follow-on offering. This caused damage in the time period following the effective date when the security price dropped to its normal trading price and buyers of the follow-on offering were subject to large losses on that holding. Regulation M prohibits the syndicate members in a follow-on offering from aggressively trading the subject security in the secondary market and has placed time restrictions on thinly traded securities to only allow trading after the effective date. The regulation also curtailed aggressive short sales in these securities that would drive the price down before the effective date my only allowing these traders to cover their short positions at the offering price established in the days following the effective date.

Answer 35

D Is specific to their own business model and that meets the minimum requirements set by FINRA FINRA rules mandate that member firms create and maintain business continuity plans. The basis of the rule is to ensure that all customers are provided with a document that explains how a business interruption will be handled. Each firm should prepare a plan that is specific to their own business model. FINRA states the minimum requirements but allows firms to customize their BCP to meet their needs.

Answer 36

C Interest rates increase Bond prices move in the opposite direction of interest rates. Rising interest rates mean falling bond prices.

Answer 37

C The account cannot be opened To open a new account, broker-dealers are required to obtain the 4 pieces of critical information: Full legal name of each customer having access to the account, home or business street address, date of birth, and taxpayer identification (SS# or Tax ID #).

Answer 38

B Upon selling your shares, you may pay a sales charge. Details on charges and fees can be found in the prospectus If a CDSC will be applied to a customer transaction, a disclosure must be made prominently on the front of the trade confirmation that states, “Upon selling your shares, you may pay a sales charge. Details on charges and fees can be found in the prospectus.”

Answer 39

B An open-end management company Common stock only trades in the primary market during a primary offering. Once the primary offering is complete, common stock shares trade in the secondary market. A mutual fund or open-end fund is continuously offered in the primary market. A closed-end management investment company has an IPO, and the securities are not redeemable back to the company itself, rather they trade in the secondary market. UITs typically have fixed maturities where the portfolio is dissolved and are not continually offered.

Answer 40

D 13 months from the date of the letter The LOI covers a maximum period of 13 months. It may be backdated 3 months, in which case the investor has 10 remaining months to complete the LOI.

Answer 41

D Capital preservation An investor who has a short-term time horizon, such as an investor approaching retirement, might not want to risk losing investment income due to market volatility. This investor would have a low risk tolerance and would need to invest conservatively.

Answer 42

A I and III In a margin account, the customer borrows money and/or securities in order to leverage the customer's investment, and it is not prohibited under the USA. Neither is arbitrage, or taking advantage of price differentials on the same security in 2 different markets. Churning (excessive trading) is prohibited in both discretionary and nondiscretionary accounts. The omission of material facts during a sales presentation is a violation of the USA.

Answer 43

D Working as a volunteer firefighter FINRA regulations require representatives to notify their firms of any outside business activities or private security transactions prior to their start. FINRA states that you may not be an employee, independent contractor, trustee, sole proprietor, officer, director, or partner of another person because of any business activity outside the scope of the relationship with your firm, unless you have provided written notice to your firm. Acting as a trustee for a trust account as a registered representative would have several potential conflicts of interest. Therefore, it is considered an OBA and must be disclosed to the firm in writing and treated as any other outside business activity. You must also disclose any offer to work with any other business or receipt of any form of compensation from a source other than your employing BD firm. Working as a volunteer firefighter would not require reporting to your firm.

Answer 44

C It will decrease to $20 per share The reason a corporation will split its stock is to make the stock more marketable or make the price more attractive for investors trading the stock in the secondary market. The company will issue more shares based on a ratio, such as 5-for-1. This will adjust the stock’s par and market value but will not affect the total value of the stockholder’s investment. $100 / 5 = $20. The number of shares outstanding will increase 5-fold. For example, an investor that owned 50 shares had a total value before the split of 50 x $100 = $5,000. After the split the investor will own 250 shares x $20 = $5,000.

Answer 45

Long-term bonds issued at short-term rate Variable rate demand notes are long-term municipal bonds that are created with money market funds and tied to money market rates. They are issued in $100,000 minimums and are only available to large or institutional investors. Municipal governments pay investors based on these short-term rates. The interest is adjusted frequently based on the interest rate environment, which is considered a variable or floating rate.

Answer 46

A Custodian The custodian is responsible for the safekeeping of all securities owned by the fund. The custodian collects interest and dividend payments from issuers and makes payments or receives payments because of securities transactions within the portfolio.

Answer 47

A 4 The economic business cycle goes through 4 phases: expansion, peak, contraction, and trough

Answer 48

Wrap accounts are considered an investment advisory product, and a person must be registered as an IA to charge wrap fees.

Answer 49

A $31.25 Treasury notes and bonds are quoted in points (one point =$10) and 32nds of points. The period is a place marker for 32nds. So the difference in the quotes is 101 24/32 - 98 20/32 = 3 4/32, or 3 1/8. 3 1/8% of $1,000 is $31.25.

Answer 50

C Within 7 calendar days An investment company is required to send payment to a customer within 7 calendar days of the redemption request.

Answer 51

D A hypothecation agreement Prior to opening an option account, the account must be approved by a registered options principal (ROP). At or before the time when the option account is approved, the customer must receive a copy of the disclosure document for options, called Characteristics and Risks of Standardized Options or options disclosure document (ODD). When opening an option account for a client, the client must have the risks involved with trading options explained. These risks are explained in detail in the ODD. This agreement explains the types of transactions allowed in their account. Each customer can have different restrictions on their accounts. Some will not be able to write options. The hypothecation agreement is required when opening a margin account, not an option account.

Answer 52

C They can deduct the entire contribution All individuals with earned income can contribute to a traditional IRA. For individuals who are not active participants in a qualified retirement plan, all IRA contributions into a traditional IRA are tax deductible. For persons who are participating in a qualified plan, deductibility depends on their income level. The specific levels of income that would qualify for a deduction change each tax year. Note: Contributions into a Roth IRA are never deductible regardless of status in a work-sponsored plan.

Answer 53

D Variable life insurance pays a death benefit to the named beneficiary upon death, but there is no beneficiary named in a variable annuity Variable life insurance policies are permanent life insurance products that accumulate cash value and pay a death benefit to the named beneficiary upon the death of the insured. On the other hand, variable annuities are intended to generate an income stream, typically to supplement retirement income. They are both considered securities that require a FINRA Series 6 or 7 license in addition to a state insurance license to sell. There is a beneficiary named with an annuity contract. During the accumulation period, the death benefit on an annuity is the greater of the current market value or the owner’s cumulative premiums paid, less any withdrawals, if a death benefit option is selected. Death benefits can apply once the contract has been annuitized, depending on which settlement option is selected.

Answer 54

Churning This action is considered churning. Churning is defined as excessive trading done in a customer's account to generate extra commission.

Answer 55

D These are used to save funds for the ongoing care of disabled individuals The ABLE (Achieving a Better Life Experience) Act established 529A plans, or ABLE accounts, and are intended to help individuals and their families living with disabilities. Like 529 plans, non-deductible contributions can be made by anyone on an after-tax basis, and qualified withdrawals are federally income tax-free. Qualified withdrawals must relate to the expenses of living with a disability, including education, housing, transportation, health care expenses, and any services needed to improve quality of

Answer 56

C The RR may not accept this offer because it is in violation of FINRA rules RRs are prohibited from accepting special deals from a distributor. Any payments made to a RR must be disclosed in the prospectus.

Answer 57

Municipal advisor A municipal advisor is a firm that provides advice to or on behalf of a municipal entity. The firm may also give advice regarding municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or solicitation of a municipal entity.

Answer 58

C SIPC SIPC is a non-profit organization that is funded by its member firms. It provides insurance protection for customers of its members in case one of those member firms files for bankruptcy protection. SIPC protects up to $500,000 per customer, of which $250,000 can be for cash claims.

Answer 59

A Monthly While it is not required, active account statements are typically sent out monthly. According to FINRA, inactive account statements must be sent out at least quarterly. Investment companies send out annual reports to the SEC and shareholders of the fund. Investment companies are also required to send semiannual reports to shareholders only.

Answer 60

C Political risk Political and military upheaval is a common concern for investors with foreign holdings, particularly in the emerging markets sector. This risk is referred to as political risk. Purchasing-power risk is the risk of inflation. Currency risk is the risk of the U.S. dollar moving negatively against a foreign currency. Interest-rate risk is the risk that as interest rates rise, outstanding fixed-income security prices will drop.

Answer 61

C The advice would be unsuitable because the selection of investments was concentrated in one industry All recommendations must be suitable given the circumstances of each client. Regulators look at suitability, not profitability. Investments concentrated in one industry would be speculative (high risk) and not suitable for most investors. Retirement accounts usually consist of a combination of equities (stocks) and bonds, with a higher percentage of the account invested in stocks if the client wants growth, or a higher percentage invested in bonds if the client is near retirement or does not want a lot of risk.

Answer 62

D $350 The prohibition against political contributions does not apply if the only contributions to officials of issuers are made by MFPs entitled to vote for such officials, provided the contributions are not in excess of $350 by each MFP to each official, per election.

Answer 63

A Prime broker A prime broker is a firm typically used by hedge funds to handle its complex needs. The hedge fund may use multiple executing brokers to handle trades, preventing a single firm from seeing the activities and duplicating the fund’s strategies. All trades are then settled through the prime broker.

Answer 64

B Profit-sharing agreement A discretionary account gives an RR or broker-dealer trading authority in an account. A discretionary account can be established with either limited or full power of attorney (POA). No broker-dealer or registered representative will exercise any discretionary power in a customer’s account unless that customer has given prior written authorization. The account must be accepted by the broker-dealer, as evidenced in writing by a qualified principal. A discretionary trade must be approved by the broker-dealer promptly after the trade is done. All discretionary accounts must be reviewed at frequent intervals to review suitability and to detect and prevent transactions that are excessive in size or frequency.

Answer 65

B If the bonds were declining in value due to lower credit ratings or rising interest rates in the market Put provisions, found on some bond issues, allow the bondholder to sell the bond back to the issuer at par value on specific dates before maturity. This provision protects the bondholders from declining values of the bonds due to lower credit ratings or rising interest rates in the market.

Answer 66

C Irrevocable Once a trust is established as an irrevocable trust, the trust and its terms cannot be changed. The assets placed in an irrevocable trust are afforded protection from creditors. The main benefit of opening an irrevocable trust is that the trust is not included in the grantor’s estate and is not subject to estate taxation. An irrevocable trust has its own tax ID, and its own tax rates.

Answer 67

A PropertY The Internal Revenue Service (IRS) is the agency under the treasury department that is responsible for collecting taxes and enforcing tax laws. The IRS has the authority to issue monetary fines and punishment for violating the Internal Revenue Code (IRC). The IRC covers rules concerning income, gift, estate, and capital gains tax.

Answer 68

A Passive portfolio managing There are several ways to rebalance a portfolio. Passive rebalancing is a type of automatic rebalancing that removes dollars from the overperforming assets and reallocates them to the underperforming assets. This can be done on an annual or quarterly basis.

Answer 69

A Freeriding A cash account is an account where the transactions are paid for with cash, or cash equivalents, within a specified time. Regulation T requires payment no later than 4 business days after the trade date or T+4. Investors must pay for their purchases of securities before selling them. If a customer attempts to profit on and then sell those same securities before paying for them, it is called freeriding and is prohibited under Regulation T.

Answer 70

A This action is acceptable only if the transaction is suitable for the client Exchanging a client from one annuity account into another is a permissible event, however there must be valid reasons for an RR to recommend a change. Valid reasons may include better performance and/or lower costs associated with a new contract. A Section 1035 exchange is often utilized to move funds from one VA to another without incurring a current tax liability

Answer 71

D Red herring While sales of new issues may not occur during the cooling-off period, the registered representatives are permitted to prospect for potential customers during this time by providing potential investors with a summary of the registration statement called the preliminary prospectus, also called the red herring.

Answer 72

A Collateral trust certificate Unsecured bonds are not backed by underlying assets or collateral. Debentures are backed by the general creditworthiness and reputation of the issuer. Subordinated debentures have a secondary claim to assets in the event of bankruptcy (behind straight debentures). Income bonds have no legal obligation to make interest payments and will only pay interest when the corporation earns enough income to do so. These bonds are issued by a corporation that is under reorganization and coming out of bankruptcy. The only choice in this question that is a secured bond is the collateral trust certificate, which is backed by the securities of another company.

Answer 73

D Commercial paper maturing in 1 year Money market instruments are short-term debt instruments, maturing in one year or less. They are highly liquid and offer safety of principal due to their short time period to maturity, as well as typically being issued by high-creditworthy issuers. Government issues, such as T-bills, are very liquid and are backed by the U.S. government, providing them with safety of principal. T-bills have maturities that are 52 weeks or shorter, and if the T-note or T-bond has one year or less remaining to maturity, they will also be considered money market securities. Bankers' acceptances are used to finance foreign trade. These are very short-term debt securities. Commercial paper that has a maturity of less than 270 days, in denominations of $50,000 and rated in one of the top three highest ratings, would be considered a money market security. In this question though, the commercial paper is maturing in 1 year, so it does not meet the requirements.

Answer 74

B It is not responsible for protecting U.S. investor The SEC functions as the ultimate enforcer of federal securities laws and is responsible for protecting U.S. investors.

Answer 75

D Owning a limited partnership interest in a local dog racing track RRs are required to notify their employers of any outside employment, whether securities related or not. Owning a limited partnership interest is an investment, not a job.

Answer 76

D Bond prices to decrease During an inflationary period, the Federal Reserve Board will tighten the money supply, which results in increasing interest rates. This slows down the economy to control inflation. As interest rates rise, bond prices tend to decrease, and yields will increase.

Answer 77

D Disclosure, care, conflict of interest, and compliance obligations The 4 components needed to meet the general obligations of Regulation BI are disclosure, care, conflict of interest, and compliance obligations.

Answer 78

C The writer is obligated to buy from the buyer The put writer receives a premium for agreeing to let the put buyer sell (put) the stock to the seller at a future date. The seller (writer) of the put is bullish on the stock and is obligated to fulfill the contract if the buyer exercises it.

Answer 79

B The market price of XYZ will increase When a corporation splits its stock, the number of shares is increased and the price per share is decreased proportionately. The earnings per share are now spread over more shares, so that figure will be decreased.

Answer 80

B The market price of XYZ will increase When a corporation splits its stock, the number of shares is increased and the price per share is decreased proportionately. The earnings per share are now spread over more shares, so that figure will be decreased.

Answer 81

A Premium Premium refers to a price above par. Discount refers to a bond price below par. The spread is the difference between the bid and ask. Exemption refers to taxation.

Answer 82

D To work with the issuer to help sell securities to the public An underwriter or investment banker is a broker-dealer that administers the public issuance and distribution of securities for a corporation or other issuing body. The underwriter works with the issuing entity to assist in determining the offering price and may buy the security from the issuer to sell to public investors through a distribution network.

Answer 83

One exempt transaction is an offering made to investors in only one state. It is known as a Rule 147 Intrastate Offering. Issuers using the exemption under Rule 147 must meet one of the following requirements: 80% of the issuer’s gross revenues must come from business activities within the state, 80% of the issuer’s assets are located within the state, 80% of the net proceeds from the offering must be used within the state, or a majority of the issuer’s employee’s must be based within the state. Securities purchased under Rule 147 may not be sold outside of the state for 6 months. The appropriate disclosures must be made to purchasers on the limitations of resale. Certificates must be marked with the appropriate legend stating any restrictions. These securities still must be registered under blue-sky laws.One exempt transaction is an offering made to investors in only one state. It is known as a Rule 147 Intrastate Offering. Issuers using the exemption under Rule 147 must meet one of the following requirements: 80% of the issuer’s gross revenues must come from business activities within the state, 80% of the issuer’s assets are located within the state, 80% of the net proceeds from the offering must be used within the state, or a majority of the issuer’s employee’s must be based within the state. Securities purchased under Rule 147 may not be sold outside of the state for 6 months. The appropriate disclosures must be made to purchasers on the limitations of resale. Certificates must be marked with the appropriate legend stating any restrictions. These securities still must be registered under blue-sky laws.

Answer 84

B 10% The risk-adjusted rate of return measures the security’s return based on the amount of risk. In this scenario growth stocks are yielding 14% while the risk-free rate of return for investing in T-bills is 4%, this makes the risk-adjusted rate of return 10%.

Answer 85

C $43 The breakeven point is when the investor will not make or lose any money. For a put, the breakeven is the strike price minus the premium (40 – 3 = 37).

Answer 86

A Gain or loss on the trade The confirmation is written documentation of a trade. It includes the trade date and the settlement date. It must be provided to the customer on or before the settlement date. The confirmation also must include: -- Identity of the security -- Price at which the trade was executed -- Quantity of securities traded -- Amount of commission paid to the broker-dealer -- Identity of the selling agent, if any -- Any other regulatory fees or taxes applicable to the transaction

Answer 87

C Hedge strategy Hedging is like buying insurance to protect a stock position. For hedging, an investor would buy (long) an option contract. With a long stock position, the investor is hoping the stock price will go up- if the stock price does go up the investor will let the option expire and will enjoy the gains in the stock position. The concern is that the stock price could decline, a long put can be purchased as protection. If the stock price declines below the strike price, the investor can exercise the put and sell the shares to the writer of the contract.

Answer 88

A The owner of the business has limited liability A sole proprietorship is a business owned by 1 person. While the owner has complete control over the business, they also have personal legal liability since the business and the owner are the same. All profits and losses of the operation are filed on the owner’s personal tax return. A sole proprietorship has a limited life, as it is based on the life of the owner.

Answer 89

B Through assessments upon member firms SIPC is not a governmental entity and receives no tax subsidies. SIPC is a private, not-for-profit organization that broker-dealers are required to join. Members are required to pay annual assessments, which are held for customer reimbursements in case of member bankruptcies.

Answer 90

C Tenants in common The purpose of a tenants in common account is to afford each investor the ability to own a portion of the account, and upon the investor's death, have their portion transfer to their estate. Under joint tenants with rights of survivorship, the surviving owner assumes ownership and control of the entire account with no interruption. In an individual account, the account passes to the single owner's estate, unless it is set up as "transfer on death" (TOD). Under TOD, the account immediately passes to the named beneficiary.

Answer 91

A Registered with the SEC Certain securities are exempt from registration. Exempt securities do not need to be registered with the SEC, since it would not make sense for certain issuers to go through the time and expense of filing the registration statement. Exempt securities include U.S. government and agency issues, municipal issues, money market issues, bank issues, common carrier issues, insurance company issues, and nonprofit or religious organization issues. While an exempt issuer is not required to register its securities with the SEC, it is still subject to the anti-fraud provisions. A non-exempt security is one that must be registered with the SEC.

Answer 92

D Interest on a timely basi Issuers of bonds are responsible to pay interest on the money borrowed in full and on a timely basis along with repayment of loan principal at maturity.

Answer 93

C $25,000 A stockholder's liability is limited to the amount of their investment. Stockholders cannot be sued for the corporation's activities, nor must they pay additional amounts if the corporation goes bankrupt.

Answer 94

D Remove $300 Limited discretion (limited POA) allows the RR to authorize transactions in the account without client approval. However, those transactions must be suitable based on the customer's financial situation, investment objectives, and risk tolerance. Limited discretion does not allow the RR to remove or add funds to the account without client approval. This activity is allowed in an account established under full discretion (full POA).

Answer 95

B Government plans ERISA regulates private sector retirement plans. Plans established by the government, a municipality, nonprofit organizations, or individual plans are not regulated by ERISA.

Answer 96

B A trade may be authorized by any account owner Ownership of the account may be equal (50/50) or unequal, but each party's interest in the account is always specified. When 1 of the account owners dies, that owner's portion of the account passes to their estate, not to a beneficiary. Any owner may act for the entire account and place trades.

Answer 97

C A red herring A registered representative is permitted to distribute a preliminary prospectus (red herring) during the cooling-off period. The red herring includes the most relevant information on the proposed new issue but lacks a final offering price and the SEC's effective date. Form 1099 is the document which details the annual taxable events (capital gains and dividends) for an investor

Answer 98

A There can be no more than 50 accredited investors who participate in the offering Most private placements are sold under Regulation D. Under Reg D, private placement transactions are exempt from registration when offered to no more than 35 non-accredited investors (persons who do not meet the definition of accredited under the Act). There are no restrictions on the number of accredited investors that can be involved in the sale. However, the total number of investors must be less than 100 or they would be forced to register as an investment company under the Investment Company Act of 1940. Through a private placement, investors purchase restricted stock. The stock is delivered with an investment letter prohibiting the resale in the secondary market for a minimum of 6 months. Restricted stock may also be referred to as letter stock

Answer 99

A Coverdell savings account Coverdell savings accounts are an often overlooked education savings program. The key benefit of a Coverdell is that the money inside of the account can be used for paying the costs of private elementary and high school tuition. Money that is contributed to a Coverdell is not tax deductible. However, the growth in the account is tax deferred. Assuming that the money is used for qualified educational expenses, the withdrawals from the account will be tax-free. Up to $10,000 per year of 529 plan assets may be used for K-12 tuition with the passing of the SECURE Act, but that is not 1 of the choices.

Answer 100

D Certain options strategies, like covered call writing, may be employed by the custodian As fiduciaries, custodians are required to protect the interests of the child. Portfolios constructed for UTMA accounts should not be overly aggressive. Most states operate under the Uniform Prudent Investors Act (UPIA) that establishes standards for fiduciaries. Under this Act, the portfolio must be invested in a prudent and diversified manner. The custodian can purchase stocks, bonds, mutual funds, unit investment trusts, and closed-end funds and can participate in covered call writing. Most other option strategies are not allowed. Since margin accounts involve borrowing money or securities, UGMA accounts cannot be margin accounts.

Answer 101

C Marital history Marital history (not marital status) is not relevant to developing a client suitability profile. Each of the other factors directly affects client suitability.

Answer 102

C Works with the issuing entity to assist in determining the offering price The underwriter, not the trustee, works with the issuing entity to assist in determining the offering price. The trustee is a firm, such as a trust company, commercial bank, or financial institution hired by bond issuers to protect the bondholders’ interests.

Answer 103

A Purchasing-power risk The RR is referring to inflation (purchasing-power) risk. Since the investor's capital is growing at a rate of 6%, any inflation will reduce the strength of their purchasing power. If for instance, inflation is 7%, their purchasing power is reduced compared to the prior year even though the money is growing. Interest-rate risk pertains to the sensitivity of the investment to changes in interest rates.

Answer 104

D Municipal bonds A taxation risk exists when income tax laws change, causing unfavorable tax consequences to securities investors. Currently municipal bonds are not subject to federal (and in some cases state and local) taxation. A change in tax laws would have the greatest impact on municipal bonds.

Answer 105

C) Buy Bonds in the open Market

Answer 106

D) Qualified distributions are excluded from federal income Tax

Answer 107

C) American Depository Receipts (ADRs

Answer 108

A) Deductibility of contributions from state taxes

Answer 109

B) Market risk