exam questions

Question 1

A customer of a broker-dealer has a cash balance in an account of $175,000 and securities holdings of $125,000. The customer asks about SIPC coverage, and you explain that the current coverage is

Answer 1

The SIPC covers customer accounts in broker-dealers to a maximum of $500,000, of which no more than $250,000 may be cash. In this case, the full $175,000 of the cash balance and all of the $125,000 securities holdings are covered for a total of $300,000.

Question 2

Members and non-members alike can look into a broker’s service and qualifications record by accessing which of the following services?

Answer 2

FINRA makes available some key information about firms and representatives through its BrokerCheck service. This is available to anyone by calling the BrokerCheck hotline or online.

Question 3

A customer is given a quote for ABC as: 17.00 – 17.25 6 × 12. This quote indicates the customer can

Answer 3

Customers can purchase at the offer (the lowest price someone else is willing to sell) and sell at the bid (the most someone else is willing to sell). With this in mind, the customer can buy up to 1,200 shares at $17.25 or sell up to 600 shares at $17.

Question 4

A member firm believes that financial exploitation of a senior customer is being attempted. While not required to, but allowed to, they put a temporary hold on disbursements of cash and securities from the account. The temporary hold should be

Answer 4

The rule specifies that the temporary hold on disbursements if one is placed should be for no longer than 15 business days. A state regulator or agency of jurisdiction can terminate it sooner or extend it longer if they deem it warranted.

Question 5

Which of the following securities is exempt from the Regulation T margin requirements but still subject to an initial margin requirement as determined by the broker-dealer?

Answer 5

While Treasury securities (bills, notes, and bonds) are exempt from Regulation T margin requirements, purchases of them on margin are allowed and would be subject to the firm’s determination of what the initial margin deposit requirement should be.

Question 6

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

Answer 6

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

Question 7

A company has just conducted a stock offering, by prospectus, through an investment banker. The proceeds of the offering are used to purchase a portfolio of securities. The stock, now in the hands of the public, is freely traded in the secondary market, and the portfolio is managed to generate maximum profit according to a specific investment objective. The company must be

Answer 7

A closed-end company, or closed-end management investment company, is much like any other company, just that its source of profit is investments, rather than selling a product or service. Shares of closed-end companies are traded in the secondary markets, while the other choices listed here offer only redeemable securities.

Question 8

All of the following people working for a registered broker-dealer would be required to be fingerprinted except

Answer 8

Registered broker-dealers must have fingerprint records made for most of their employees, including all directors, officers, and partners, those involved in sales and those who handle cash or customer securities. While a clerk handling all incoming mail is likely to be to in a position to handle cash or securities coming to the broker-dealer, a driver is not.

Question 9

Failure to complete the regulatory element continuing education (CE) requirement within the allotted time period will result in

Answer 9

Failure to complete the regulatory element within the allowable time frame will lead to FINRA’s deactivating that person’s registration until the CE regulatory element is met.

Question 10

After the filing of a registration for a new issue with the Securities and Exchange Commission (SEC), and still in the registration’s cooling-off period, broker-dealers may

Answer 10

During the cooling-off period, red herrings (preliminary prospectuses) may be distributed and tombstone advertisements may be published. Indications of interest can be taken but are nonbinding on all parties. Sales literature may not be distributed during the cooling-off period.

Question 11

A bank issues and guarantees certificates of deposit, and those that are negotiable are considered money market instruments. What makes a CD negotiable?

Answer 11

While all of these are characteristics of negotiable certificates of deposit issued by banks, it is the ability to trade the CDs in the secondary market that makes them negotiable.

Question 12

All of the following are considered unique or nonstandard corporate actions except

Answer 12

Corporate actions where the adjustments to cost basis are standardized would include cash and stock dividends, even and uneven splits both forward and reverse and the issuance of rights and warrants. All other corporate actions are considered nonstandard. Examples would include mergers and acquisitions, takeovers, spin-offs, tender offers and buy-backs or repurchases of stock.

Question 13

As interest rates rise, prices of preferred stock will

Answer 13

Because it pays a fixed dividend, preferred stock is interest-rate sensitive. As rates rise, prices of preferred stocks tend to fall and vice versa.

Question 14

Regular way settlement for Treasury bills is

Answer 14

All U.S. government issues settle next business day (T+1).

Question 15

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

Answer 15

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

Question 16

What are the two basic types of return on an investment?

Answer 16

Upon the purchase of a security, the investors may receive dividends or interest, which are forms of income, or they may sell the security for a different price than was paid for it, which represents a capital gain or loss.

Question 17

Which of the following is a true statement with regard to either U.S. securities laws or the description of international economic factors?

Answer 17

When the dollar is strong, foreign currency buys fewer U.S. goods. On the other hand, the strong dollar would buy more foreign goods. A tombstone is not a prospectus nor can it be used instead of a prospectus when securities are sold. The Securities Act of 1933 regulates the primary (new issue) market. During a bankruptcy liquidation, preferred shareholders and common shareholders come after all other debt obligations have been satisfied.

Question 18

Caleb Wilson receives an email from his client, Shelby Bogdin, requesting the year-to-date performance on several of her mutual funds. Wilson immediately looks up the performance and emails her a response. This type of communication would be classified as under FINRA rules as

Answer 18

FINRA has three classifications of communication with the public. Correspondence is communication to 25 or fewer retail investors in a 30-day period. Retail communications is to more than 25 retail investors in a 30-day period. Institutional communication is going to banks, insurance companies, mutual funds, et cetera. Responding to an email is not prohibited as long as the rep follows his company policies. Respondence is a word, however, it has nothing to do with FINRA communication rules.

Question 19

Which of the following sets of FINRA rules focuses on fair dealing with the public?

Answer 19

The Conduct Rules deal with a broker-dealer’s (and representative’s) relationship with the customer and the public. The Uniform Practice Code deals with interactions with other broker-dealers.

Question 20

ABC Corporation raised capital through an offering of equity securities. Which component of the balance sheet has changed as a result?

Answer 20

When equity securities are issued, cash (a current asset) and net worth increases. Fixed assets and liabilities remain unchanged as a result of the offering.

Question 21

Which of the following are true of qualified plans but not true of nonqualified plans?

Answer 21

Qualified plans require IRS approval, and the contributions are tax deductible. Because nonqualified plans’ contributions are not deductible, they do not require IRS approval.

Question 22

Deflation occurs during

Answer 22

Deflationary periods in the economy are most associated with severe recessions. Recessions occur during periods of economic contraction in the business cycle.

Question 23

Downturns in the business cycle or economic contractions are characterized by all of the following except

Answer 23

When the economy is contracting, inventories tend to rise (not fall) due to a decreasing demand for goods.

Question 24

Portfolio diversifying might be used to reduce which of the following risks?

Answer 24

Nonsystematic risks can be reduced using diversification. These would include business, financial, credit, and liquidity risk (among others). Market, inflation, and interest-rate risks are types of systematic risks that are considered nondiversifiable because they impact all investments and, therefore, cannot be diversified away or mitigated simply by diversifying.

Question 25

Which of the following is among the items of information that must be entered on a new account form?

Answer 25

The facts that are required on a new account form are aimed at facilitating the operation of the account, properly identifying the customer, and guarding against money laundering and other illegal activities. Of the choices offered, only the names of those with access to the account would help with these goals, so this item of information is the only one on the list that is required.

Question 26

Records relating to a Currency Transaction Report (CTR) must be retained for

Answer 26

Currency Transaction Reports (CTRs) must be retained on file, together with other records generated in conjunction with them, for five years.

Question 27

A bond with 10 years to maturity and callable in five years at par is sold at a discount. Rank the following yields from lowest to highest.

Answer 27

The bond is trading at a discount. The lowest of all yields for a discount bond is the nominal or stated yield (coupon rate), which is a fixed percentage of par. Next would be the current yield and then YTM. The highest possible return to the owner of a bond purchased at a discount would occur if the bond were called before maturity, because less time must elapse for the investor to receive the discount.

Question 28

James Thomas calls and is interested in buying some GNMA certificates and wants to know when payment will be due. You should tell him

Answer 28

Regular way settlement is T + 2 for everything except treasuries, money market securities, and options.

Question 29

Which of the following investment companies do not redeem their shares?

Answer 29

Face amount certificates, unit investment trusts, and open end funds all redeem their shares. Closed end funds do not redeem their shares.

Question 30

If the portfolio of a variable annuity separate account is directly and actively managed by the insurance company, the separate account must be registered as

Answer 30

If managed by the insurance company's own investment advisor, a separate account must register as an open-end company. If it is managed by a third party, it must register as a unit investment trust.

Question 31

A 40-year-old individual is not covered by a retirement plan at work. What is the maximum contribution this individual can make to a traditional IRA this year?

Answer 31

While the exact annual contribution limit numbers are not likely to be tested, students should know that for those not covered by a retirement plan at work, the maximum contribution allowed by the IRS would be permitted and can be deducted on one's tax return. The deduction, however, would be phased out above a certain income level for those who do have a retirement plan at work. The catch-up provision only applies to those age 50 or older.

Question 32

For options, each is a two-party contract, which allows

Answer 32

Options contracts involve two parties: buyer and seller. The buyer has the right to exercise the contract, and when this occurs, the seller is obligated to fulfill the terms of the contract.

Question 33

The risk that an investor might not be able to sell an investment quickly and at a fair market price is known as

Answer 33

Having investments that are liquid means being able to divest of them quickly at a fair price. Liquidity risk comes for investors holding assets where doing that might not be possible.

Question 34

All of the following are true of prohibited activities except

Answer 34

There can never be a complete list of all the ways to cheat people. If it looks like lying, cheating, or stealing, don't do it.

Question 35

The maximum loss on a short put is

Answer 35

The maximum loss on a short put is limited by the fact the stock price cannot drop below zero. The maximum loss on a short put occurs if the stock drops to zero and the seller of the put is exercised. The seller is forced to buy the worthless stock for the strike price, but at least gets the premium to offset the loss.

Question 36

For registered shares held by an affiliate (known as control stock), which of the following applies?

Answer 36

Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate.

Question 37

An applicant for registration was convicted of a misdemeanor within the past five years having to do with a motor vehicle driving infraction. For purposes of filing Form U4 for registration with a member firm, the applicant

Answer 37

Non-securities-related misdemeanor convictions (such as a driving infraction) do not have to be reported on an applicant's Form U-4 when applying for registration. Securities- or money-related misdemeanors and felony convictions within the past 10 years must be reported. These disqualifies an applicant from registering (statutory disqualification).

Question 38

Hedge funds attempt to

Answer 38

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

Question 39

Your client Dana McCarthy has no investment experience. She just retired and won't be in a high tax bracket. She also is concerned about volatility of her investments. She is more concerned about preserving her principal than getting a high rate of return. Which of the follow would you recommend?

Answer 39

The money market funds have a stable $1 value, but she doesn't need the municipal debt money market because she isn't in a high tax bracket. The other two will have significant volatility.

Question 40

An investment company wishes to provide incentives for registered representatives of several broker-dealer firms to sell their investment products. The company proposes to send some selected representatives to a sales training seminar. Which of the following would be acceptable features of the trip?

Answer 40

The trip itself is acceptable in principle, because it has a business purpose. Having it in the Canary Islands would be inappropriate. Side tours, outings, and so on are acceptable, provided the guests pay their own expenses for them. Paying the expenses of guests would be inappropriate as well. Permission of the employing firm to attend is always required.

Question 41

All of the following actions would cause the NAV per share of a mutual fund to decrease except

Answer 41

When shareholders redeem shares the assets in the fund go down, but the number of shares also decrease proportionally, so the NAV per share is unchanged. In a similar way, when investors purchase shares the assets and the outstanding share increase proportionately, so the NAV remains unchanged. In the other responses the assets decrease with no proportional decrease in the number of shares, so NAV would decrease.

Question 42

A registered representative has left a firm and joined another. The new firm must obtain a copy of the Form U-5 filled out by the old firm. Where might the new firm obtain a copy of the form?

Answer 42

Copies of a new employee's Form U-5 may be obtained from the employee, or from FINRA's Central Registration Depository (CRD). Whichever the source, the firm must obtain the copy within 60 days of filing the new Form U-4 for the new employee.

Question 43

Which of the following records must be kept for the life of a broker-dealer firm?

Answer 43

Certificate books on the stock issued by the firm must be kept as long as the firm is active. The general ledger and customer ledgers need only be kept for six years, and forms U-4 and U-5 regarding the firm's associated persons need only be kept for three years.

Question 44

Which of the following regarding income is true?

Answer 44

While someone's salary or bonus would be earned income, investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and capital gains derived from the sale of securities.

Question 45

A registered representative was guilty of an undetected minor rule violation during the last year of employment at a broker-dealer firm. The representative has now decided to leave the industry. For how long might the representative still be subject to fines or other sanctions by Financial Industry Regulatory Authority (FINRA) if the violation is belatedly detected?

Answer 45

FINRA retains jurisdiction over a registered person for two years after the person leaves the industry.

Question 46

Which of the following acts deals with money laundering?

Answer 46

The Securities Act of 1933 requires the registration of most new issues, The Securities Exchange Act of 1934 created the SEC, the Securities Investor Protection Act of 1970 created SIPC, and The PATRIOT Act written after 9/11 addresses money laundering and other anti-terrorist issues.

Question 47

Which of the following transactions has the least risk?

Answer 47

Short against the box is when a customer owns the shares she wants to sell but borrows some additional shares, sells the borrowed shares, and then covers the short position with shares already owned. Historically it was a tax strategy, but it doesn't work as well anymore with the tax law change. There is no loss potential. Buying to open can cause a loss of the amount invested; selling short and selling to open have unlimited loss potential.

Question 48

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

Answer 48

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

Question 49

Having been told that a firm incorporates proprietary trading in its business model buying and selling securities into and out of its own inventory you would know that it is

Answer 49

Broker-dealers who incorporate proprietary trading into their business model are known as market makers. As a market maker the broker-dealer trades in their own account attempting to profit. A firm making markets may be a carrying firm or a fully disclosed firm. Commissionable transactions are those done by brokers for customer accounts, not proprietary trades.

Question 50

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

Answer 50

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

Question 51

An investor pays 102 ($1,020) for a $1,000 par value bond. At maturity,

Answer 51

A $1,000 par value bond purchased at 102 ($1,020) is bought at a premium to par. Whenever a bond is purchased for an amount greater than will be received at maturity, the premium paid decreases the return. In this case, the additional $20 paid when the bond was initially purchased reduces the overall return from the interest payments received.

Question 52

All the following are coincident indicators except

Answer 52

Changes in durable goods inventories (whether an increase or decrease) is a leading economic indicator. Trade sales, retail employment, and personal income are all coincident indicators.

Question 53

A customer who is short against the box may close the position by all the following except

Answer 53

A customer who is short against the box owns the stock he shorted. As a result, the customer may use his owned stock to cover the short position, buy back the short position in the open market, or any combination of the two. The customer cannot simply deposit funds into his account.

Question 54

A Japanese computer chip manufacturer wants to attract U.S equity investors. Which of the following securities would help the issuer to accomplish this goal?

Answer 54

ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when shares are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. The ADR provides U.S. investors with a convenient way to diversify their holdings beyond domestic companies.

Question 55

An investor holds shares of a manufacturing company where disposal of the by-products produced during the manufacturing process is necessary. The Environmental Protection Agency (EPA) updates the rules applicable to disposing of the product. For the investor, these changes present a form of

Answer 55

Changes in the regulatory climate or specific rules that might impact how a company operates or its ability to do so profitably are recognized as regulatory risk.

Question 56

Of the following stocks, which would be defined as penny stocks?

Answer 56

A penny stock is a non-Nasdaq listed (therefore, Bulletin Board or OTC Pink) stock trading under $5 per share. If a stock is listed on an exchange or listed on Nasdaq, it is not a penny stock, regardless of price.

Question 57

The transfer agent for a corporation is responsible for each of the following except

Answer 57

The transfer agent (often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates. Acting as an intermediary in a trade is the function of the clearing corporation.

Question 58

Which of the following is true regarding the primary market?

Answer 58

The primary market is where securities are sold to the investing public through issuer transactions. It is regulated by the Securities Act of 1933. The NYSE is an example of a secondary market where price is determined by supply and demand.

Question 59

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

Answer 59

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

Question 60

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

Answer 60

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

Question 61

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

Answer 61

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

Question 62

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

Answer 62

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

Question 63

Calls made regarding of all of the following under the Telephone Consumer Protection Act of 1991 (TCPA) are exempt except

Answer 63

The TCPA exempts calls made to parties with whom the caller has an established business relationship or from whom the caller has prior express permission or invitation to call, call made on behalf of a tax-exempt nonprofit organizations or not made for a commercial purpose and those made for legitimate debt collection purposes. Calls made unsolicited for the purpose of prospecting new clients or to solicit sales of securities products or services of broker-dealers are covered by the act.

Question 64

A customer of a Financial Industry Regulatory Authority (FINRA) member firm buys securities on margin. The customer is expected to pay a rate of interest on the margin loan based on which of the following?

Answer 64

The broker call loan rate is the interest rate banks charge broker-dealers on money they borrow to lend to margin account customers. Margin accounts permit customers to purchase eligible securities without paying in full. Typically, an investor is required to deposit only 50% of the purchase price of eligible common stock with the balance being borrowed. The amount borrowed, as with any loan, is subject to interest payments.

Question 65

The ask price represents

Answer 65

FINRA and the SEC do not set prices; broker-dealers post their own prices. The broker-dealer buys at the bid and sells at the ask. The customer buys at the ask and sells at the bid.

Question 66

The benefits of designating a brokerage account as transfer on death (TOD) are that

Answer 66

The transfer on death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account's assets upon death. Those named persons may be changed whenever the account holder wishes. Although this designation allows the account to bypasses probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.

Question 67

If your client, Marvin Blackwell, places a sell stop order at 38 when ABC is trading at 40, at which of the following prices could the order be filled?

Answer 67

A sell stop order is an instruction to sell at the market when a trade occurs at or below the stop price. If ABC stock's price drifted down and trades at 38, the stop is triggered. Even if it leaps over 38 to 37.95, for example, the stop would trigger. Remember that a stop, when triggered, becomes a market order. Market orders may fill at any price.

Question 68

A certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor is

Answer 68

A bond is best described as a certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor. A bond certificate also states the borrower's obligation to pay the investor a specific rate of interest for the use of the funds.

Question 69

Each of the following makes regular interest payments except

Answer 69

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

Question 70

An investor in the United States is purchasing a security traded on a foreign securities exchange. The transaction on the exchange is priced in euros. The circumstances of this purchase and subsequent sale of the security exposes the investor to

Answer 70

Whenever investing abroad, investors may be exposed to a number of risks that would not occur when investing in the U.S. domestic markets. Currency risk, for example, is the possibility that an investment denominated in one currency could decline if the value of that currency declines in its exchange rate with the U.S. dollar.

Question 71

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

Answer 71

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

Question 72

A GTC order is left unexecuted at the end of the trading day on the last business day of April. Which of the following is true?

Answer 72

All GTC orders if unexecuted will be automatically canceled on the last business day of April and the last business day of October. If the customer wishes to have the order continue working beyond that date, it must be reentered after the automatic cancelation.

Question 73

An investor holding a 4.5% callable bond has it called away by the issuer when interest rates fall to 3.5%. This is an example of

Answer 73

Call risk (the risk that when interest rates fall, issuers will call in existing callable debt) issues often leads to reinvestment risk for the investor. While receiving one's principal back sooner than expected, the investor is now left to reinvest at the now lower yield rates.