For Exame Flashcards
Study
Analysis: Beta
An investor holds an equity position that outperforms the market when the overall market advances but underperforms the market when the overall market declines. Which of the following statements are true?
A) The equity position has an alpha less than 1.
B) The equity position has an alpha greater than 1.
C) The equity position has a beta less than 1.
D) The equity position has a beta greater than 1.
D) A security or portfolio with a beta greater than 1 will likely experience higher highs (outperform the market) and lower lows (underperform the market). Beta is a measurement of the volatility of an asset relative to the general market.
Alternative Inv: DPP:
Your firm is distributing units of a direct participation program (DPP) to several high-net-worth clients. Fred maintains a discretionary account with you. You may purchase these units for Fred’s account
A) with prior written permission from your supervisor.
B) after informing him that he needs to send in his payment within three business days.
C) after receiving his written consent.
D) once you have established that these securities are suitable for him.
C) A registered representative may not use standing discretion to purchase non-traditional instruments in a customer account. Because of the heightened suitability standards applicable to products such as direct participation programs, the client must provide advance written consent when purchasing these products.
A client will be making a down payment on a new home in six months and seeks the advice of her registered representative on the best way to invest funds. The registered representative is most likely to recommend a(n)
A) exchange-traded note.
B) money market fund.
C) hedge fund.
D) six-month CD.
Suitability/Customer recommendations:
The registered representative would likely recommend the six-month certificate of deposit (CD), which would return a higher yield than the money market fund. The hedge fund and exchange-traded note are not liquid investments and would not be appropriate choices for this client.
A new client has opened an options account at a broker-dealer. She must sign and return the Options Agreement
A) within 15 days of account approval.
B) within 10 days of placing her first trade.
C) before placing her first trade.
D) at least 15 days before account approval.
Regs: FCF - Options Regs/Disclosures
The Options Agreement must be signed and returned to the broker-dealer within 15 days of account approval. Note that a customer can actually trade in the account (for up to 15 days) before having signed and returned the Options Agreement.
Debt: Bond Conversion
When it is more advantageous for an investor to convert their bond into the underlying common shares rather than redeem their bond pursuant to a call notice, the likely result is (a)
A) risk arbitrage.
B) forced conversion.
C) leveraged buyout.
D) conversion parity.
Debt:
A forced conversion will occur when the call price of the bond is less than the market value of the underlying common stock received upon conversion.
Regulation NMS is intended to assure that investors
A) do not trade on material non-public information.
B) have long positions in the securities they place orders to sell.
C) receive audited financial statements from their broker-dealers each year.
D) receive the best price executions for their orders by encouraging market competition.
Regs: (Reg NMS)
This is the primary objective of Regulation NMS. NMS means National Market System. It was established in 2005 to foster competition among markets and among individual client orders.
National Market Systems
Options (Regs): Options Regs/disclosure
Sales materials for options distributed by a broker-dealer must include which of the following disclosures?
A) “Options trading is best suited for high-net-worth and accredited investors”
B) “Options may not be suitable for all investors”
C) “Options are very speculative products and should only be traded by investors who have a high-risk tolerance”
D) “Options trading can result in significant financial losses, so investors should be mindful of these important financial risks”
Options (Regs):( Flashcard front – Options Regs/disclosure)
All options sales material must include the disclosure “Options may not be suitable for all investors”.
Analysis: balance sheet dividend effect
Hank Industries is paying a cash dividend to stockholders of record on May 20. Which of the following is not true?
A) Net worth declines
B) Current liabilities decline
C) Retained earnings are unchanged
D) Current assets decline
When a corporation pays a cash dividend, both assets & liabilities decline, meaning there is no change to net worth. Dividends payable is a current liability that will decline once the dividend is paid. Cash is a current asset, and upon paying the dividend, cash and therefore, current assets, will also decline. The firm’s net worth is unchanged.When a corporation pays a cash dividend, both assets & liabilities decline, meaning there is no change to net worth. Dividends payable is a current liability that will decline once the dividend is paid. Cash is a current asset, and upon paying the dividend, cash and therefore, current assets, will also decline. The firm’s net worth is unchanged.
Regs or Customer Accounts: (options) for a client that has died
A registered representative has received notification of the death of one of his customers, a long-standing client for many years. At the time of learning of the death, the client had a pending sell limit order with the registered representative. The registered representative should now
A) liquidate all open positions in the account and forward all proceeds to the trusted contact on the account.
B) notify his supervisor of the death and proceed to liquidate all open positions in the account.
C) execute the order immediately and then freeze the account.
D) cancel the order immediately and then freeze the account.
Regs or Customer Accounts:
When a customer passes away, any open orders should be canceled immediately, and the account should be frozen.
Trading markets: trading ticket errors
Jack has entered the wrong account number on an order memorandum. Jack should
A) notify the customer.
B) notify his supervisor.
C) notify FINRA.
D) place the order in the error account.
Trading markets: (Flashcard front – trading ticket errors)
In this situation, Jack should notify his supervisor of the mistake. He is not authorized to access the error account on his own.
Regs: A registered representative has a client who is a CPA, and this client is offering, for a fee, to direct some of her accounting clients to the registered representative for potential participation in an upcoming IPO the firm will be a managing underwriter on. May the broker-dealer compensate the CPA for these leads?
These types of compensation arrangements are known as “finders fees”, and are permitted, even if the individual (the CPA in this case) is not FINRA registered. Any fees paid should be in cash only, and represent a flat or hourly fee, and not be tied to the success of any deals or transactions. If the individual is FINRA registered, the fees may be commission-based.
A registered representative has a client who is a CPA, and this client is offering, for a fee, to direct some of her accounting clients to the registered representative for potential participation in an upcoming IPO the firm will be a managing underwriter on. May the broker-dealer compensate the CPA for these leads?
A) No, the broker-dealer cannot make any compensation arrangements with the CPA, as such relationships are considered conflicts of interest.
B) No, these types of compensation arrangements are prohibited by FINRA rules.
C) Yes, but the CPA would need to be a FINRA-registered person in order to receive any such compensation, often called a finder’s fee.
D) Yes, but any compensation must be in the form of cash (not securities), and it should only be a flat or hourly fee, and not tied to the success of any deals.
Government Issues: T Bills
These types of compensation arrangements are known as “finders fees”, and are permitted, even if the individual (the CPA in this case) is not FINRA registered. Any fees paid should be in cash only, and represent a flat or hourly fee, and not be tied to the success of any deals or transactions. If the individual is FINRA registered, the fees may be commission-based.
Which of the following securities are quoted on a discounted yield basis?
A) Treasury bill
B) Treasury bond
C) 25-year convertible debenture
D) 20-year public-purpose municipal bond
Busniess Development Co.
Government Issues: FCFF - T Bills
Treasury bills are a type of short-term zero-coupon security and make their only payment to investors at the time of maturity. For this reason, they are quoted on a discount yield basis, meaning the percentage discount they are trading off of face value.
Which of the following statements best describes a business development company?
A) It is an investment vehicle that takes positions in mature companies with a strong record of earnings and dividends.
B) It is an entity typically organized as an open-end investment company.
C) It is usually organized as a closed-end investment company that takes positions in small and mid-sized companies.
D) It is an investing entity that purchases interests in companies that recently declared bankruptcy and proceeds to sell these businesses out of their portfolios at substantial profits and distribute the cash flows from these sales to investors.
Alternative INV: FC front. BDC
A business development company is typically organized as a closed-end investment company, with shares that are publicly traded. They invest in small and mid-sized businesses, by either taking equity positions or providing loans. Like traditional investment companies, they must pay out at least 90% of taxable income to investors to avoid taxation, and they usually pay dividends to shareholders either monthly or quarterly.
A broker-dealer is creating a sales and marketing script, to serve as the basis for an upcoming seminar to be delivered by firm personnel. At least 100 retail clients will be invited to join the seminar. According to FINRA rules, this script
A) is considered retail communication and must be approved by a principal prior to use.
B) must be filed with, and approved by, FINRA at least 10 days prior to the delivery of the seminar.
C) may be used without principal approval provided no specific recommendation or advice is provided during the seminar.
D) is considered institutional communication and must be approved by a principal prior to use.
Regs: FCF - Sales/Advertising Requirements
A sales script will be considered retail communication if it is distributed or made available to more than 25 retail investors within a 30 calendar-day period.
Regs: FCF - Sales/Advertising Requirements
A sales script will be considered retail communication if it is distributed or made available to more than 25 retail investors within a 30 calendar-day period.
15) On January 1st, an investor buys 1 XYZ Apr 50 call at 4 and sells 1 XYZ Apr 50 put at 2 1/2. Both options expire unexercised. What are the tax consequences for the investor?
A) $400 gain on the call, $250 gain on the put
B) $400 loss on the call, $250 loss on the put
C) $150 net capital gain
D) $150 net capital loss
A highly leveraged company
Options:
loses When an investor purchases an option and it expires unexercised the investor the premiums. Therefore, there is a $400 loss on the call purchased and a $250 gain on the put sold for a net loss of $150.
16) A company that is highly leveraged has as the smallest portion of its capitalization
A) debentures.
B) convertible debentures.
C) preferred stock.
D) common stock.
Analysis: FCF Leverage
A highly leveraged company means that the company has taken on lots of debt and raises the smallest portion of capital from its equity, or common stock.
Options (spreads): Calendar Spread
A variable annuity contract held by an investor is set to annuitize in the next 30 days. When this occurs,
A) accumulation units will be converted into a variable number of annuity units.
B) annuity units will be converted into a fixed number of accumulation units.
C) annuity units will be converted into a variable number of accumulation units.
D) accumulation units will be converted into a fixed number of annuity units.
Equities: FCF -Variable Annuity Characteristics
When a variable annuity contract is annuitized, the accumulation units are converted in a fixed number of annuity units. The value of these annuity units will fluctuate from month to month, providing the investor with the ‘variable’ return which is typical of these products.
In July a customer creates a horizontal spread by purchasing 10 XYZ OCT 50 calls and by selling 10 XYZ August 50 calls. Which of the following statements is true concerning this strategy?
A) This is a straddle
B) This is a calendar spread
C) This is a dollar spread
D) This is a combination
Options (spreads): FC Front Calendar Spread
This is a calendar spread because the strike prices are the same and only the expiration dates are different.
A registered representative receives an order from a retail customer to purchase a security that is not currently on the firm’s recommended list. The registered representative
A) may accept the order but must mark the order “solicited”.
B) will accept and execute the order, marking the order memorandum “unsolicited”.
C) may not accept the order, explaining that the firm does not follow the security.
D) must receive written approval from his supervisor prior to accepting the order.
Trading Markets: Ticket Requirements
A registered representative may accept this order and must mark the order “unsolicited”.
Business development companies are required to pay out at least 90% of their taxable income to investors in order to avoid paying federal income taxes. Note that this question is asking for which statement is “not” accurate.
Alternative INV: FC Front - BDC
Which of the following is not a characteristic of a business development company (BDC)?
A) They provide the platform for non-accredited investors to invest in emerging businesses
B) They must pay out at least 50% of their taxable income to investors to avoid federal taxation.
C) They take equity positions in financially troubled businesses
D) Typically organized as a closed-end investment company
Suitability/ Customer Recommendations:
Alternative INV: BDC
Business development companies are required to pay out at least 90% of their taxable income to investors in order to avoid paying federal income taxes. Note that this question is asking for which statement is “not” accurate.
An individual has holdings in three different fund families. A purchase of shares in a fourth family may
A) may not be combined with the holdings of the three existing funds for breakpoint considerations.
B) be aggregated with the holdings of the three existing positions to qualify for breakpoints.
C) qualify for breakpoint consideration if the individual signs a backdated letter of intent.
D) only be executed under a 13-month letter of intent.
Suitability/ Customer Recommendations:
Investors may not use their holdings in different fund families to qualify for breakpoints in other funds.
A financial institution buys $90,000 of 8%, 20-year revenue bonds. For book purposes, the institution uses straight-line accretion, but for tax purposes the institution uses cost. The bonds are sold after three years for $99,000. What will be the taxable gain?
A) 7500
B) 5000
C) 9000
D) 3000
Debt: FC Front: Bond Sale Taxable Gain or Loss
For tax purposes, the institution uses the cost basis, which is the price at which it purchased the bonds - $90,000.
They sold the bonds for $99,000 with a $90,000 tax basis, yielding a taxable gain of $9,000.
The yields on private label, or non-agency CMOs, can be higher than the yields on agency CMOs, as the underlying collateral will be more speculative, or less secure, than a government agency guarantee.
Alternative INV: – CMO characteristics
Regarding CMOs, which of the following statements is correct?
A) CMOs carry no interest rate risk if they are backed by U.S. government agency securities
B) The yields on private-label CMOs can be higher than the yields on agency CMOs owing to the characteristics of the underlying collateral
C) The interest payment on an agency CMO is taxable at the federal, state, and local levels, whereas the interest payment on a private label CMO is taxable at the federal level only.
D) All CMOs are backed by the federal government.
Alternative INV: FC Front – CMO characteristics
The yields on private label, or non-agency CMOs, can be higher than the yields on agency CMOs, as the underlying collateral will be more speculative, or less secure, than a government agency guarantee.
An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 81⁄2 % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar)
POP = (NAV/ 100% - SC%) = $10.30/.915 = $11.26 SC = POP NAV = .957
Total Sales Charge = .957 x 1000 shares = $957
POP - (100% - 8.5% = 91.5%) (10.30 / 91.5 = 11.26 SC% ) = POP - Nav = .957 X 1000 = $957
An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 81⁄2 % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar)
A) 875
B) 96
C) 957
D) 88
Alternative Inv: FC Front – Sales charge
POP = (NAV/ 100% - SC%) = $10.30/.915 = $11.26 SC =
POP - NAV = .957
Total Sales Charge = .957 x 1000 shares = $957
Taxes: - Wash Sale Rule
Two weeks ago, Ethan closed a short position in ABC Inc. common stock that he’d been carrying for a few months. He realized a five-point loss on the transaction. Today, Ethan tells you he is considering another short sale, this time of ABC Inc. convertible bonds. You should tell Ethan that
A) you first need to check with your stock.
B) there may be an adverse tax consequence connected to the
common stock position that he closed two weeks ago if he chooses to proceed with this trade.
C) he may incur a substantial loss if interest rates rise.
D) selling convertible bonds short is never a good idea since they are always more challenging to borrow than the common stock.
If an investor sells stock short, Reg SHO requires
Taxes: FC Front - Wash Sale Rule
If Ethan proceeds with his short sale, this may be considered a wash sale, which would disallow the loss Ethan realized when he covered his short position. A wash sale occurs when a securities position is closed for a loss and that same, or substantially similar, security position is re-established within 30 days.
Which of the following is NOT reasonable cause to believe that the
seller can make delivery of securities?
A) The securities are not on a “hard-to-borrow” list
B) The securities are on the “available securities” list
C) The customer is long the stock
D) The customer has a written agreement to borrow the stock
Alternative Inv: LP requirements
Reg: FC Front – Reg SHO
If an investor sells stock short, Reg SHO requires the customer to locate the securities. The customer can locate by either borrowing the securities or by relying on the available securities list. Absence from a “hard-to-borrow” list, is not sufficient to satisfy the locate requirement.
Debt: – Debt Risk Hedging
An investor has purchased ten bonds that will mature one year after the next. As one bond matures, the proceeds are reinvested in a ten-year bond. This is an example of a
A) positive yield curve.
B) serial bond structure.
C) laddered portfolio.
D) balloon maturity.
This is an example of a laddered bond portfolio. This strategy is often employed to minimize interest-rate risk and to increase liquidity. If interest rates rise, you are able to reinvest the proceeds from the maturing bonds into higher-yielding bonds. If interest rates fall, there is protection against reinvestment risk from the longer-maturity bonds at the top of the ladder. These bonds will also appreciate in market value.
Alternative Inv: FCF – LP requirements
In order to form a limited partnership, the tax ID and signature of
which of the following parties is required?
A) General partners and all limited partners
B) Limited partners
C) General partners
D) General Counsel
Alternative Inv: FCF – LP requirements
In order to form a limited partnership, the tax ID numbers and signatures of all general partners will be required.
Regs: FCF – BD or RR U4 requirements
May a registered representative hold a second job while working full-time for a FINRA member firm?
A) No, as this would violate FINRA rules on outside employment.
B) Yes, provided prior written consent from a principal is requested and received.
C) Yes, this would be acceptable, provided the RR provides advance written notice to their firm.
D) No, as many FINRA member firms have policies that prohibit this activity.
Options: debit spread
Regs: FCF – BD or RR U4 requirements
Outside business activities, such as second jobs, require the registered representative to provide prior written notice to the firm. Consent is not required.
Options: – credit spread profitability
If a credit spread widens,
A) the investor will break even.
B) a profit will be realized.
C) both contracts will expire.
D) a loss will be realized.
Options: FCF – credit spread profitability
In option spreads, the investor wants a debit spread to widen and a credit spread to narrow. If the opposite happens, a loss may be realized.
Options: – debit spread
Ken has sold 1 EUR May 145 call and purchased 1 EUR May 135 call. Which of the following statements is correct?
A) Ken has sold a straddle and is expecting little change in the value of the EUR
B) Ken has executed a debit spread and is bullish on the EUR
C) Ken has executed a credit spread and is bearish on the EUR
D) Ken has executed a long straddle and is seeking volatility in the EUR
Taxes: Maximum Annual Loss Deductions
Options: FCF – debit spread
Ken has executed a debit spread on the EUR and thus is taking a bullish position on the EUR.
Alternative Inv: - REITS (taxes)
Preferential tax treatment does not apply in which of these instances?
A) Company X owns the preferred shares of Company Y and receives a $35,000 cash dividend from Y
B) Ben took a distribution of $12,500 from his Section 529 Plan to cover his daughter’s next tuition payment at her community college
C) Abagail received a distribution of $2,500 from her real estate investment trust which she has owned for three years
D) Jerry purchased 2,000 shares of Company K on May 1, 75 days prior to the ex-dividend date for the next common share distribution for which Jerry received $.20 per share.
Alternative Inv:- REITS (taxes)
Distributions from a Real Estate Investment Trust are subject to regular income tax, unlike ordinary cash dividends from common or preferred shares, which may be subject to regular tax liability depending on the length of time the shares were held surrounding the ex-dividend date. If the shares were held for at least 61 of the 121-day period surrounding the ex-dividend date, any dividends received would be taxable at a preferred rate. Distributions from a Section 529 plan are not taxed if used for qualified educational expenses. Dividends paid to a corporation are taxed at a preferred rate depending on the level of ownership the company has in the business.
Taxes: – Maximum Annual Loss Deductions
A maximum of $3,000 of net capital losses may be used by an
investor each year to
A) reduce ordinary income.
B) reduce capital gains.
C) offset tax deductions.
D) increase tax deductions.
Debt: Interest Rate Effects on Debt Instruments
During a period of stable interest rates,
Taxes: – Maximum Annual Loss Deductions
An investor may use up to $3,000 per year of net capital losses to reduce ordinary income. Note that there is no limit to the amount of capital losses that can be used to offset capital gains.
MUNIS:- Takedown
Which of the following best represents the total takedown in a municipal underwriting?
A) Additional takedown plus underwriting fee
B) Additional takedown plus selling concession
C) Manager’s fee plus additional takedown
D) Manager’s fee plus selling concession
MUNIS: Takedown
In a municipal underwriting, the total takedown is the additional takedown plus the selling concession.
Debt: FCF – Interest Rate Effects on Debt Instruments
During a period of stable interest rates,
A) corporate bond issuers are more likely to exercise the call features on their bonds.
B) the volume of IPO issuance will likely expand.
C) equity valuations will always surpass the returns on corporate debt.
D) the price of a straight bond will likely be less volatile than the price of a convertible bond.
Debt: FCF – Interest Rate Effects on Debt Instruments
During a period of stable interest rates, the price of a convertible bond will likely be more volatile than other types of debt because their value is tied to the underlying equity.
During a period of stable interest rates,
A) corporate bond issuers are more likely to exercise the call features on their bonds.
B) the volume of IPO issuance will likely expand.
C) equity valuations will always surpass the returns on corporate debt.
D) the price of a straight bond will likely be less volatile than the price of a convertible bond.
Debt: FCF – Interest Rate Effects on Debt Instruments
During a period of stable interest rates, the price of a convertible bond will likely be more volatile than other types of debt because their value is tied to the underlying equity.
Options: FCF – Put Options:
Mario has written a put option. When this put option expires
A) the open interest will increase.
B) Mario is under no further obligation to purchase the underlying security.
C) the holder of the option contract realizes a short-term capital gain.
D) Mario will receive an assignment notice.
Options: – Put Options:
When a put option expires, Mario will retain the premium and bears no additional obligation to purchase the underlying securities. You got this
Alt Inv –CMOs:
As compared to agency CMOs, private label CMOs will generally have
A) lower credit quality and higher yields.
B) lower prepayment risk and greater extension risk.
C) higher credit quality and lower yields
D) greater prepayment risk and lower extension risk.
Alt Inv –CMOs:
Private label CMOs will generally have a lower credit quality and therefore higher yields when compared to agency CMOs.
Options – FCF Spreads:
Jennifer has purchased an XYZ June 30 call and sold an XYZ June 35 call. Jenny has created a
A) bull put credit spread.
B) bear call credit spread.
C) bear put debit spread.
D) bull call debit spread.
This is how a bull call debit spread can be structured. She bought the more expensive call and sold the less expensive call with the same maturity.
Debt: FCF – Suitability/Customer recommendations:
A registered representative might recommend a bond ladder to a client who is
A) confident that short- term interest rates will remain stable but
long term rates will increase.
B) uncomfortable investing in stocks and would rather allocate all of his investable capital in stable, interest paying bonds.
C) attempting to minimize the impact of interest rate risk on his portfolio.
D) concerned that interest rates will fall, and prepayments will rise.
Debt: FCF – Suitability/Customer recommendations:
A bond ladder is appropriate for someone looking to minimize interest rate risk and increase liquidity in their portfolio. It involves purchasing bonds with different maturity dates, so that each bond matures at a different time (perhaps every year). Typically, the maturities are evenly spaced so that the bonds are maturing at regular intervals, and the proceeds are being reinvested at regular intervals. The more liquidity an investor needs, the tighter the maturity structure of the portfolio should be. NOTE: this is a defensive move against interest rate risk.
Alt Inv: FCF- CMOs:
All of the following issue collateralized mortgage obligations except
A) Freddie Mac.
B) Fannie Mae.
C) Ginnie Mae.
D) Sallie Mae.
Alt Inv: FCF- CMOs:
Sallie Mae provides loans for students for higher education. It WAS ORIGINALLY a GSE (Government Sponsored Enterprise) but it began the privatization process in 1997. It completed this in 2004 and is now publicly traded.
Customer Accounts:-Opening Accts:
To open a securities account for a corporation, which of the following items is not required?
A) Corporate charter
B) Limited Power of Attorney
C) Corporate resolution
D) New account form
Customer Accounts: FCF-Opening Accts:
A Power of Attorney Is not required for a corporation to open a securities account unless it is a discretionary account. A corporate resolution IS required.
Alt Inv. FCF – REITS
Which of the following investment vehicles passes through gains but not losses to investors?
A) Real estate investment trust (REIT)
B) Unit investment trust (UIT)
C) Collateralized mortgage obligation (CMO)
D) Master limited partnership (MLP)
Alt Inv. FCF – REITS (begin fresh from what I sent at the end of SIE prep REIT Flashcards!):
A real estate investment trust will pass through investment gains, but not losses, to investors.
A real estate investment trust will pass through investment gains, but not losses, to investors.
Debt: FCF - ELN
Which of these statements is true regarding equity-linked notes (ELNs)?
A) They offer principal protection
B) Investors are guaranteed a minimum payout from the note
C) They are issued as common or preferred shares and trade on exchanges
D) The value of the note is unaffected by the credit quality of the issuer
Debt: FCF - ELN
Equity-linked notes (ELNs) are typically issued by an investment bank in the form of a debt security. While the note offers principal protection, any payouts will be based on the performance of an underlying security or index, as well as the credit quality of the issuer (kinda like a debenture).
Customer Accts: - Know Your Customer:
Fred has a significant net worth and a long history of making speculative investments. He now seems confused and disoriented and shows signs of dementia. When he places an order for a large quantity of penny stocks, you should:
A) suggest that he purchase a blue- chip stock to provide some safety to his portfolio.
B) contact his family before placing the trade.
C) ask to meet with Fred and another family member.
D) follow his instructions, as this type of trade is consistent with his investment history.
Customer Accts: FCF - Know Your Customer:
In this situation, you should tell Fred that you’d like to meet with him in person and ask him to bring along an adult member of his family. You need to confirm in person and have a “trusted person” come with him.
Under Rule 144A, unregistered securities can be resold to qualified institutional buyers
A) immediately.
B) after a one-year holding period.
C) after a 6-month holding period.
D) after a 3-month holding period
Regs: FCF – Rule 144A:
Rule 144A allows qualified institutional buyers (QIBs) to freely trade private placements. A QIB is an institution with at least $100 million in assets.
1) An investor holds an equity position that outperforms the market when the overall market advances but underperforms the market when the overall market declines. Which of the following statements are true?
A) The equity position has an alpha less than 1.
B) The equity position has an alpha greater than 1.
C) The equity position has a beta less than 1.
D) The equity position has a beta greater than 1.
D
Analysis: Flash Card front, beta)
A security, or portfolio with a beta greater than 1 will likely experience higher highs (outperform the market) and lower lows (underperform the market). Beta is a measurement of the volatility of an asset relative to the general market.
Your firm is distributing units of a direct participation program (DPP) to several high-net-worth clients. Fred maintains a discretionary account with you. You may purchase these units for Fred’s account
A) with prior written permission from your supervisor.
B) after informing him that he needs to send in his payment within three business days.
C) after receiving his written consent.
D) once you have established that these securities are suitable for him.
C
Alternative Inv: Flash Card Front, DPP)
A registered representative may not use standing discretion to purchase non-traditional instruments in a customer account. Because of the heightened suitability standards applicable to products such as a direct participation programs, the client must provide advance written consent when purchasing these products.
A client will be making a down payment on a new home in six months and seeks the advice of her registered representative on the best way to invest funds. The registered representative is most likely to recommend a(n)
A) exchange-traded note.
B) money market fund.
C) hedge fund.
D) six-month CD.
D
Suitability/Customer recommendations:
The registered representative would likely recommend the six-month certificate of deposit (CD), which would return a higher yield than the money market fund. The hedge fund and exchange-traded note are not liquid investments and would not be appropriate choices for this client.
A new client has opened an options account at a broker-dealer. She must sign and return the Options Agreement
A) within 15 days of account approval.
B) within 10 days of placing her first trade.
C) prior to placing her first trade.
D) at least 15 days prior to account approval.
A
Regs: FCF - Options Regs/Disclosures
The Options Agreement must be signed and returned to the broker-dealer within 15 days of account approval. Note that a customer can actually trade in the account (for up to 15 days) before having signed and returned the Options Agreement.When it is more advantageous for an investor to convert their bond into the underlying common shares rather than redeem their bond pursuant to a call notice, the likely result is (a)
A) risk arbitrage.
B) forced conversion.
C) leveraged buyout.
D) conversion parity.
When it is more advantageous for an investor to convert their bond into the underlying common shares rather than redeem their bond pursuant to a call notice, the likely result is (a)
A) risk arbitrage.
B) forced conversion.
C) leveraged buyout.
D) conversion parity.
An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 81⁄2 % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar)
A) 875
B) 96
C) 957
D) 88
Alternative Inv: FC Front – Sales charge
POP = (NAV/ 100% - SC%) = $10.30/.915 = $11.26 SC = POP - NAV (10.30) = .957
Total Sales Charge = .957 x 1000 shares = $957
