Final Exam Questions Flashcards
When a carrying firm receives a transfer request from the Automated Customer Account Transfer Service (ACATS) system, it must validate or protest the transfer within: I.) A reasonable period II.) Three business days III.) One business day IV.) Two business days
III.) One business day
A bond has a 5% coupon and is trading at a 5.55% basis. The bond is trading at which of the following price levels?
A.) 101 3/4
B.) A discount
C.) Par
D.) A premium
D.) Discount
A customer sells 500 shares of stock to a broker-dealer, a registered market maker in this stock. The broker-dealer acted in a(n):
A.) Agency capacity and charged the customer a commission
B.) Principal capacity and charged the customer a commission
C.) Agency capacity and charged the customer a markup
D.) Principal capacity and charged the customer a markdown
D.) Principal capacity and charged the customer a markdown
A broker-dealer that is always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and a markup when selling stock to a customer. When acting in an agency capacity, the broker-dealer will normally charge the customer a commission.
An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Which of the following statements is TRUE?
A.) memo must be prepared describing any action taken in response to the complaint
B.) The firm must keep a copy of the complaint for six years
C.) The principal must review the complaint and submit a written response to the customer
D.) The firm must enter promptly into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted
A.) memo must be prepared describing any action taken in response to the complaint
All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years.
XYZ Corporation earned $4 per share and paid out $2 per share in dividends. XYZ Corporation is selling at $56 in the market. The price/earnings ratio of XYZ Corporation is:
A.) 9.3 to 1
B.) 2 to 1
C.) 28 to 1
D.) 14 to 1
D.) 14 to 1
The price/earnings ratio is computed by dividing the market price of $56 by the earnings per share of $4. This equals a price/earnings ratio of 14 to 1 ($56 divided by $4 equals 14).
The term that's used when a company sells stock to the public above par value is: A.) Capital excess B.) Earned surplus C.) Paid-in capital D.) Extraordinary earnings
C.) Paid-in capital
An investor’s goal is to buy a security that establishes a fixed return, for a long period, with no reinvestment risk. Which of the following securities BEST suits the investor’s needs?
A.) Common stock
B.) Treasury bonds
C.) Treasury STRIPS
D.) Highly rated corporate bonds
C.) Treasury STRIPS
The typical yield-to-maturity calculation assumes that each interest payment is reinvested at the same yield. There is no guarantee that the investor could reinvest at the same yield (reinvestment risk). Treasury STRIPS are zero-coupon bonds (long-term). Interest is automatically reinvested and compounded at the same yield and reinvestment risk is avoided.
Which of the following choices is NOT a type of overlapping debt?
A.) Debt issued between two states
B.) The issuance of debt for an adjoining school district
C.) The issuance of debt for an adjoining road district
D.) Debt issued between two counties
A.) Debt issued between two states
Debt issued between two states is not considered overlapping debt. Overlapping debt is general obligation debt of other governmental units for which residents of a particular municipality are responsible. It is the debt shared by residents of a municipality for services or facilities shared by several municipalities. Examples of overlapping debt include debt for an adjoining road district or school district, or debt issued between two counties.
A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock?
A.) $48.00
B.) $40.60
C.) $25.00
D.) $30.00
A.) $48
If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant.
A firm is not permitted to accept an exercise notice from a customer for a listed equity option after:
A.) 4:30 p.m. Eastern Time on the expiration date of the option
B.) 2:30 p.m. Eastern Time on the expiration date of the option
C.) 5:30 p.m. Eastern Time on the expiration date of the option
D.) 3:30 p.m. Eastern Time on the expiration date of the option
C.) 5:30 p.m. Eastern Time on the expiration date of the option
According to SRO rules a firm is permitted to accept from a customer, an exercise notice for a listed equity option no later than 5:30 p.m. Eastern Time on the expiration date of the option (the third Friday of the expiration month). Brokerage firms, however, may set an earlier deadline for notification of an option holder’s intention to exercise.
A municipal bond that was issued at par is purchased by an individual in the secondary market at a price of 90. What is the tax consequence if the bond is held to maturity?
A.) $100 capital gain
B.) $100 ordinary income
C.) $100 tax-free interest
D.) $100 capital loss
B.) $100 ordinary income
An investor purchasing a secondary market discount municipal bond will have ordinary income if the bond is held to maturity. Since the bond was purchased at 90 ($900) and held to maturity when the investor receives par ($1,000), the investor will have a $100 gain, which is reported as ordinary income.
A customer sells 1,000 shares of stock and asks for the actual time of the execution. For a branch office manager, what is the appropriate action?
A.) To send the customer a copy of the order ticket
B.) To state that the firm is able to provide this information on written request
C.) To state that it is impossible to know the time of the trade
D.) To indicate that the customer should contact the equity trading desk
B.) To state that the firm is able to provide this information on written request
According to the SEC’s confirmation rules, a broker-dealer must automatically disclose the time of execution or indicate that the time of execution is able to be furnished on written request by a customer.
If a firm places a temporary hold on a customer’s account:
A.) It applies to either the entire account or specific disbursements
B.) It applies to the entire account
C.) It only applies to specific disbursements
D.) It is required to obtain the prior approval of FINRA
A.) It applies to either the entire account or specific disbursements
If a firm places a temporary hold on a customer’s account, it can apply to either the entire account or specific disbursements. If the firm places the temporary hold, it must permit disbursements from the account if there is no reasonable belief that financial exploitation is occurring (e.g., paying normal bills).
Which of the following statements is NOT TRUE of industrial development revenue bonds?
A.) They may be used to finance the construction of commercial property that will be used by private corporations
B.) They are issued by local municipal governments
C.) Their credit rating is determined by an analysis of the municipal government issuing the bonds
D.) Interest is paid from rents received from private corporations
C.) Their credit rating is determined by an analysis of the municipal government issuing the bonds
Industrial development revenue bonds are issued by local municipal governments to build factories or other commercial properties. The plant or property is leased by the municipality to a corporation. The interest on the bonds is paid from the lease rental payments made by the corporation. The credit rating of the bond is based on the credit rating of the corporation and not on an analysis of the credit rating of the municipal government issuing the bonds.
A mutual fund has the following breakpoints:
Dollar Amounts Breakpoints $0 to $24,999 5.50% $25,000 to $49,999 4.50% $50,000 to $74,999 3.50% $75,000 to $99,999 2.50% $100,000 and above 1.50%
A customer has signed a letter of intent for $100,000 and makes the following three investments:
$35,000 in April
$52,000 in June
$24,000 in September
What’s the sales charge percentage on each purchase?
A.) April 3.50%, June 2.50%, September 1.50%
B.) April 4.50%, June 2.50%, September 1.50%
C.) April 4.50%, June 3.50%, September 5.50%
D.) April 1.50%, June 1.50%, September 1.50%
D.) April 1.50%, June 1.50%, September 1.50%
When signing a letter of intent (LOI), all purchases over a 13-month period are accumulated and the sales charge on the first and subsequent purchases are based on the letter of intent amount. In this example, the purchases total $111,000 and, as a result, the sales charge will be 1.50% on each purchase.
A bond has a 6% coupon and is trading with an 8.34% basis. The bond is trading at which of the following price levels?
A.) Cannot be determined
B.) Par
C.) A discount
D.) A premium
C.) A discount
Basis (or yield basis) is a different method of expressing yield to maturity. In this case, the yield to maturity is higher than the coupon rate. The only time a client’s yield to maturity is above the coupon is when the bond has been purchased at a price less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.
A customer wants to purchase a security that invests primarily in private companies that have difficulty raising capital in public markets. Which of of the following investments would you recommend?
A.) A collateralized mortgage obligation (CMO)
B.) A real estate investment trust (REIT)
C.) A direct participation program (DPP)
D.) A business development company (BDC)
D.) A business development company (BDC)
A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.
Which of the following statements is NOT a feature of GNMA pass-through certificates?
A.) Pools consist of fixed-rate residential mortgages
B.) Interest is subject to federal tax but is exempt from state tax
C.) Interest and principal payments are made on a monthly basis
D.) They are backed by the U.S. government
B.) Interest is subject to federal tax but is exempt from state tax
The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.
When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term rates compared to long-term rates?
A.) There is no relationship between the fluctuations in long-term and short-term rates.
B.) Both long- and short-term rates fluctuate equally.
C.) Long-term rates fluctuate more sharply than short-term rates.
D.) Short-term rates fluctuate more sharply than long-term rates.
D.) Short-term rates fluctuate more sharply than long-term rates.
When interest rates are fluctuating, short-term rates will fluctuate more sharply than long-term rates. However, in terms of prices, when interest rates are fluctuating, long-term bond prices are affected more than short-term bond prices.
An MIG rating applies to a(n):
A.) ADR
B.) BAN
C.) Convertible bond
D.) Prerefunded utility bond
B.) BAN
MIG (Moody’s Investment Grade) ratings apply to municipal notes. A BAN (bond anticipation note) is the only municipal note listed.
The prospectus for a variable annuity contract:
I.) Must be filed with the SEC
II.) May be delivered electronically
III.) Must provide full and fair disclosure
IV.) Must detail all sales charges and ongoing expenses of the contract
A.) I, II, and III only
B.) I, III, and IV only
C.) I, II, III, and IV
D.) I and II only
C.) I, II, III, and IV
On Tuesday May 1, XYX Corporation’s Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is:
A.) Tuesday, May 1
B.) Thursday, May 24
C.) Friday, May 11
D.) Monday, May 14
C.) Friday, May 11
Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.
Which of the following statements is TRUE concerning electronic communication networks (ECNs)?
A.) They can be used only by institutional investors.
B.) They can be used by clients who don’t want to use a broker-dealer.
C.) They can be used only by retail investors.
D.) They can be used by investors who want to trade anonymously.
D.) 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.
An employee of a broker-dealer owns shares of XYZ in his personal account. His spouse is a director of XYZ Corporation. If XYZ is engaged in a secondary offering of stock, can shares be purchased in a joint account that’s owned by the employee and his spouse?
A.) Yes, but only in the personal account of the spouse who’s not a director of the issuer.
B.) No, because both are considered associated persons of the firm.
C.) No, unless there are unsold portions of the secondary offering.
D.) Yes, because secondary offerings are permitted to be sold to restricted persons.
D.) Yes, because secondary offerings are permitted to be sold to restricted persons.
Only the sale of initial public offerings (IPOs) of equity securities are prohibited to restricted persons. Since secondary offerings are not considered new issues, they can be sold to associated persons of broker-dealers. Since the spouse is a director of the issuer, the sale would be permitted even if it was an IPO.
XYZ convertible debentures are convertible into 20 shares of XYZ Corporation common stock. If the bonds were selling in the market at $960, what would the common stock need to be selling for to be on parity?
A.) $50
B.) $20
C.) $19.20
D.) $48
D.) $48
To find the stock’s parity price, divide the current market price of the bond ($960) by the conversion rate (ratio) which is given as 20 shares. This equals $48.
A customer who purchases shares of an exchange-traded fund (ETF) may be extended credit by a broker-dealer:
A.) If the position has been held for at least 30 days
B.) If the position has been held for at least 10 days
C.) Under no circumstances
D.) Immediately
D.) Immediately
In this question, the client is purchasing shares of an ETF. ETF shares trade on an exchange and are not considered new issues; therefore, credit may be extended immediately. Some investment company securities, such as mutual fund shares, are marginable under Reg. T. However, since mutual fund shares are considered new issues, the Securities Exchange Act of 1934 prevents a broker-dealer from extending credit on them for at least 30 days. Once the mutual fund shares have been held for 30 days, they may be used as collateral for a loan in a margin account.
A syndicate is formed on an undivided (Eastern) account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is:
A.)Liable to sell all of the unsold bonds
B.) Not liable to sell the unsold bonds
C.) Liable to sell 10% of the unsold bonds
D.) Liable to sell $1,000,000 of the unsold bonds
C.) Liable to sell 10% of the unsold bonds
In an Eastern (undivided) account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is also responsible to sell 10% of the unsold bonds.
Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the:
A.) Current market value
B.) Par value plus accrued interest
C.) Par value less accrued interest
D.) Par value
B.) Par value plus accrued interest
A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.
Which TWO of the following choices are characteristics of reverse convertible securities?
I.) The coupon rate is usually above prevailing market rates
II.) The coupon rate is usually below prevailing market rates
III.) The investor may have an obligation to purchase shares of an equity security
IV.) The investor may have the right to sell shares of an equity security
A.) II and IV
B.) I and III
C.) II and III
D.) I and IV
B.) I and III
Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.
An investor that wants to hedge a portfolio of preferred stocks can buy:
A.) S&P 500 call options
B.) Yield-based call options
C.) S&P 500 put options
D.) Yield-based put options
B.) Yield-based call options
Yield-based options are based on the yield-to-maturity of Treasury bonds, rather than the price of Treasury bonds. Essentially, yield-based calls will increase in value as bond prices fall because of the inverse relationship between yield and price. As is true for bond prices, preferred stock prices are inversely related to the movement of interest rates. An investor who wants to hedge its preferred stocks is worried that the prices will decline and that interest rates and yield-to-maturity on bonds will rise. An investor who fears that yields will rise should buy the option that gains value due to an increase in yields. The best hedge for the investor is to buy yield-based call options.
Two similar companies issue bonds at the same time. One company issues convertible bonds and the other issues nonconvertible bonds. Which two of the following statements are TRUE?
I.) The convertible bonds will probably offer a higher coupon rate.
II.) The convertible bonds will probably offer a lower coupon rate.
III.) The convertible bonds will probably have a higher current yield.
IV.) The nonconvertible bonds will probably have a higher yield to maturity.
A.) II and IV
B.) I and IV
C.) I and III
D.) II and III
A.) II and IV
Which of the following statements is NOT TRUE concerning a structured product offered by an RR?
A.) The principal that the investor would receive may be based on the value of a stock traded on an exchange
B.) They are usually registered with the SEC
C.) Since this product is usually sold by a bank, the principal will be protected by the FDIC
D.) The principal the investor would receive may be based on the value of a foreign currency
C.) Since this product is usually sold by a bank, the principal will be protected by the FDIC
Structured products may be linked to individual securities, commodities, foreign currencies, or indexes. These products are underwritten by most major financial services institutions and are usually registered as securities with the SEC. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.
Which of the following is an expense or charge NOT normally associated with a variable annuity?
A.) Administrative expenses
B.) Expense charges
C.) Investment management fees
D.) Redemption fees
D.) Redemption fees
Investment management fees, expense risk charges, and administrative expenses are all charges associated with variable annuities. A redemption fee is assessed upon redemption of a mutual fund.
Two individuals hold $100,000 in assets in a JTWROS account. Each party’s ownership in the account may be described as:
A.) Equal and divided
B.) Unequal and undivided
C.) Equal and undivided
D.) Unequal and divided
C.) Equal and undivided
A level debt service bond issue is one in which:
A.) Annual principal payments are equal
B.) Annual interest payments are equal
C.) All principal is paid at the issue’s final maturity
D.) Combined annual interest and principal payments are equal
D.) Combined annual interest and principal payments are equal
In a new municipal issue, what is a group order?
A.) An order placed by three or more members
B.) An order allowing all members to benefit
C.) An institution purchasing bonds from a syndicate
D.) A dealer buying for a group of investors
B.) An order allowing all members to benefit
- ) A presale order is any order placed before the syndicate that actually purchases the issue from the issuer
- ) A group order is a situation where all members of the syndicate share in the profit
- ) A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale
- ) A member order is an order placed by members for their customers
Types of orders that can be placed with a syndicate
- ) A presale order is any order placed before the syndicate that actually purchases the issue from the issuer
- ) A group order is a situation where all members of the syndicate share in the profit
- ) A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale
- ) A member order is an order placed by members for their customers
A Web site is being designed for a registered representative of a member firm. Which TWO of the following statements are TRUE regarding the design of this Web site?
I.) The FINRA logo must be displayed
II.) The registered representative’s firm name must be displayed
III.) A reference to FINRA membership is permitted
IV.) Links to other Web sites are not permitted
A.) II and IV
B.) I and III
C.) II and III
D.) I and II
C.) II and III
Care should be taken in the design of Web sites. The name of the member firm with whom the registered representative is associated must be displayed. While the use of the FINRA logo is NOT permitted, the registered representative’s association with a FINRA member firm is allowed. However, when a reference to FINRA membership is used, the Web site must provide a hyperlink to FINRA’s home page. Links to other Web sites are allowed but care should be taken that these sites do not provide fraudulent or misleading information.
