General Review Flashcards
comprehensive study guide (151 cards)
1
Q
instrument is another word for
A
security
2
Q
Your customer owns 2,200 shares of LMN common stock. LMN Corporation issues stock rights related to an additional offer of shares that will increase the company’s common shares by 20%. How many rights will your customer receive?
A) 440 rights, B) 220 rights C) 2200 rights D) cannot be determined
A
C) 2200 rights
Stock rights (or preemptive rights) grant existing stockholders the opportunity to maintain their proportionate ownership in a company by buying the newly issued shares before the company offers them to the public.
Shareholders receive one right per share owned.
Warrants, in comparison, are usually offered to the public as sweeteners in connection with other securities, such as debt instruments (bonds) or preferred stock.
3
Q
True or False) Investors in hedge funds should know that the funds are unregulated and, therefore, have no requirements for those who invest in them.
A
False: A hedge fund is an actively managed private investment fund that pools money from accredited investors and seeks high returns by using complex strategies and significant risk.
Hedge funds must abide by the same registration and prospectus requirements imposed by Securities Act of 1933 as well as regulations regarding sales of shares mandated by the Investment Company Act of 1940.
4
Q
What is the primary market?
A
The primary market is the financial market where new securities are issued and sold for the first time.
5
Q
True or False: The secondary market involves the buying and selling of existing securities.
A
True
6
Q
Fill in the blank: In the __________ market, companies raise capital by issuing stocks and bonds to investors.
A
primary
7
Q
Which market allows investors to trade securities after they have been issued?
A
secondary market
8
Q
What is the capital market?
A
The capital market is a financial market where long-term debt or equity-backed securities are bought and sold.
9
Q
What is an option in trading?
A
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before a specified expiration date.
10
Q
True or False: A call option gives the holder the right to sell an underlying asset.
A
False
11
Q
What is intrinsic value in options trading?
A
Intrinsic value is the difference between the underlying asset’s current price and the option’s strike price, representing the actual value of the option if exercised immediately.
12
Q
Fill in the blank: The time value of an option is the portion of the option’s price that exceeds its __________ value.
A
intrinsic
13
Q
What does a put option allow an investor to do?
A
A put option allows an investor to sell an underlying asset at a predetermined price before a specified expiration date.
14
Q
Which of the following is NOT a factor that affects an option’s time value? A) Time until expiration B) Volatility of the underlying asset C) Current price of the underlying asset D) Interest rates
A
C) Current price of the underlying asset
15
Q
What is the strike price in options trading?
A
The strike price is the predetermined price at which an option can be exercised.
16
Q
True or False: An option can have both intrinsic value and time value.
A
True
17
Q
What happens to the time value of an option as it approaches expiration?
A
The time value generally decreases as the option approaches expiration, a phenomenon known as time decay.
18
Q
What is the term for the price paid to purchase an option?
A
Premium
19
Q
True or False: A call option is more valuable when the underlying asset’s price is below the strike price.
A
False
20
Q
What is meant by ‘in the money’ for call options?
A
‘In the money’ for call options means the underlying asset’s current price is above the strike price.
21
Q
What does it mean if a put option is ‘out of the money’?
A
A put option is ‘out of the money’ when the underlying asset’s current price is above the strike price.
22
Q
Fill in the blank: The maximum loss for a buyer of a call or put option is limited to the __________ paid for the option.
A
premium
23
Q
What is volatility, and why is it important in options trading?
A
Volatility refers to the degree of variation of a trading price series over time. It is important in options trading because higher volatility increases the potential for price movement, which can increase the time value of options.
24
Q
What is a primary offering of securities?
A
A primary offering of securities is the initial sale of stocks or bonds by a company to investors, often to raise capital.
25
True or False: A secondary offering occurs when a company sells additional shares after its initial public offering (IPO).
True
26
Fill in the blank: In a primary offering, the issuer receives the proceeds from the sale of the securities, while in a secondary offering, the proceeds go to _______.
the selling shareholders
27
Which of the following is NOT typically a reason for a secondary offering? A) To raise additional capital B) To allow early investors to liquidate shares C) To fund new projects
C) To fund new projects
28
What is the main difference between a primary offering and a secondary offering?
The main difference is that in a primary offering, the company issues new shares to raise capital, while in a secondary offering, existing shares are sold by current shareholders.
29
What information could an investor expect to see in a Tombstone advertisement?
* Issuer, security, amount to be sold
* Names of the underwriters
* POP, or a range if the POP is not set
* A disclaimer that reads *"This announcement is neither an offer to sell nor a solicitation of an offer for these securities. That offer is made only by prospectus."*
30
An investor has purchased Class A mutual fund shares. The net asset value (NAV) per share of the fund is the price the investor
will receive upon redemption of the shares.
The NAV per share of a mutual fund is calculated by dividing the net assets of the fund by the number of shares outstanding. When purchasing Class A shares, NAV plus a sales charge is paid. When redeeming the shares, the investor simply receives NAV.
31
The prospectus requirement in an IPO of a security that is not listed in the National Market System is
90 days.
32
True or False: For real estate DPPs, income and capital growth are possible.
True: For real estate DPPs, both income and capital growth are possible. Income comes from the property rents received, and capital growth would come from the appreciation of the properties.
33
The cover page or beginning of a summary prospectus must contain
a standardized listing of certain information, including the fund's name, share classes offered, ticker symbols, information on how to get a full prospectus, a warning that the information is in summary form, and other facts.
34
The XYZ May 45 puts are trading 2.50. The current market value (CMV) for XYZ stock is $42.50. The May 45 put is
A) without any intrinsic value. B)
at parity. C) at the money. D) out of the money.
B) at parity.
The amount that an option is in the money is its intrinsic value (IV). In this case, 2.50 points (45 − 42.50 = 2.50). An option is at parity when the premium equals intrinsic value. The premium of 2.50 equals the contract's 2.50 IV; therefore, the option is at parity.
35
True or False: The Options Clearing Corporation (OCC) sets standard exercise prices, expiration dates, and premium prices for options contracts.
False: The OCC sets standard exercise prices and expiration dates for all listed options, but the options **premiums that buyers pay are determined by the market.**
36
An investor receives a quote of 22–22.15 for BuyStuff, Inc. common stock. Which of these is correct?
I. Purchasing the stock will cost $22 per share.
II. Purchasing the stock will cost $22.15 per share.
III. The spread is $0.15.
IV. The investor will receive $22.15 per share if selling.
B) II and III
A quote always represents the bid and the ask (offer) price. Investors pay the current ask price when purchasing and receive the current bid price when selling. The spread is the difference between the bid and the ask.
37
**True or false**: Municipal bonds, US government bonds, savings and loan issues, and public REIT securities are exempt from registration per the Securities Act of 1933.
**False**: Though some REITs trade on exchanges and others may not, all public REITs are **nonexempt** securities which must be registered with the Securities and Exchange Commission (SEC).
Municipal bonds, US government bonds, and savings and loan bonds ARE all exempt per the Securities Act of 1933.
38
What decisions do mutual fund investors vote on?
Mutual fund investors vote on crucial corporate decisions such as membership of the board and approval or ratification of an investment adviser's contract.
39
Who decides which stocks to sell out of the mutual fund portfolio?
The investment adviser decides which stocks to sell out of the portfolio.
40
Who is responsible for day-to-day business decisions in a mutual fund?
Day-to-day business decisions are up to those who report to the Board of Directors (BOD).
41
True or False: Mutual fund investors have control over day-to-day business decisions.
False
42
Fill in the blank: Mutual fund investors vote on crucial corporate decisions, such as _______.
membership of the board
43
Fill in the blank: The _______ decides which stocks to sell out of the mutual fund portfolio.
investment adviser
44
What type of decisions are mutual fund investors not involved in?
Day-to-day business decisions
45
What is a fully disclosed firm?
A fully disclosed firm is a brokerage that provides clients' identities and transactions to a clearing firm, which then handles settlement and custody.
46
True or False: An introducing broker-dealer (BD) is responsible for the actual clearing and settlement of trades.
False
47
Fill in the blank: In a fully disclosed arrangement, the _______ firm executes trades while the _______ firm manages the clearing process.
introducing, clearing
48
What is the primary role of a clearing firm in a fully disclosed setup?
The primary role of a clearing firm is to settle trades, hold client funds and securities, and manage the risks associated with trade execution.
49
Multiple Choice: Which of the following best describes the relationship between an introducing broker-dealer and a clearing firm? A) They are competitors B) They collaborate under a fully disclosed agreement C) They operate independently without any agreement D) They are the same entity
B) They collaborate under a fully disclosed agreement
50
True or False: A penny stock includes both listed and unlisted securities trading at less than $5 per share.
False: The definition of a penny stock does not include listed securities (those listed on U.S. exchanges).
51
Both new and established customers are required to abide by the risk disclosure statement rules for penny stocks but only _ would have to sign a _ .
new customers/suitability statement
52
Your client, Alice Tate, with no other positions in her margin account, is bearish on ABC stock. Which of the following transactions would you recommend?
A) *Buy ABC to open*, OR, B) *Sell ABC to open*
**B) Sell ABC to open**;
Because there are no other positions, this would be an opening transaction and selling the stock would be bearish.
53
What is the tax status of a dividend paid to a U.S.-based American depositary receipts (ADR) investor?
These dividends may be subject to a withholding tax by the home country of the underlying foreign stock issuer.
Any trading profits (capital gains) from the ADR would only be taxable here in the United States.
54
Common carriers (e.g., railroads), municipalities, and charities are
examples of **exempt** issuers under the Securities Act of 1933
55
Your customer, a resident of the State of Utah, wants to purchase a debt issue. His options are a 10-Year STRIP, a Phoenix, Arizona, Municipal Water District revenue bond, or, a California Steel, Inc., debenture.
He asks how taxes are applied to either option.
A municipal bond's interest is received tax free at the federal level but is only tax free at the state level to residents of the state from which the bond was issued.
Treasury issues are taxable at the federal level but, not the state level.
A corporation's interest payment is taxed at all levels.
56
True or False: A corporate account may only trade on margin if it is specifically permitted in the corporate charter.
False: Corporate and partnership accounts may trade on margin **as long as they are not specifically restricted from doing so** in the corporate charter or the partnership agreement for partnerships.
The wording *"only trade on margin if it is specifically permitted"* makes the statement incorrect.
57
a brokerage account that enables investors to borrow money from their broker to purchase securities, for leverage, or to sell short
a margin account
58
What are margin requirements?
Rules on the amount of funds that must be maintained in the account relative to the value of the holdings bought or shorted on margin.
59
What occurs when a margin account's value drops below the required level?
The broker will require the account holder to add money to their account.
60
What is a margin call?
A demand from brokers for additional funding when an account's equity falls below the maintenance requirement.
61
What is the initial margin requirement for stocks according to Regulation T?
50%.
62
What is the typical maintenance margin requirement for holding positions?
Often 25% of the value of held securities.
63
What are maintenance margin requirements for currencies, futures, and other derivatives?
Often less than 10% of the value of any holdings.
64
What happens if an investor does not respond to a margin call within the required time frame?
Brokers have the right to sell securities in the account without prior consultation.
65
What is forced liquidation?
The process where brokers sell securities in the account at their discretion if the margin call is not met.
66
How long does an investor typically have to respond to a margin call?
Within 2-5 business days.
67
True or False: Maintenance margin requirements are generally higher than initial margin requirements.
False.
68
**_** is one in which the grantor gives up control over the assets placed in the trust. Because the grantor no longer controls these assets, they are typically excluded from the grantor's taxable estate, making this trust structure a common estate planning tool.
an irrevocable trust
69
True of false: Neither Coverdell plans nor Section 529 savings plans have income restrictions.
**False**: Coverdell plans HAVE income restrictions; Section 529 plans do not.
70
A wealthy investor wants to begin to move assets out of her estate in a way that will allow for easy transfer of ownership upon her death. This investor still wants to benefit from the assets while she is alive but, she needs to lower the size of her estate before she passes. She doesn't like the idea of a public hearing as required per probate. What may be a suitable consideration for this investor? *A) revocable living trust B) irrevocable living Trust C) place assets in TOD account*
B) irrevocable trust.
*The assets in a revocable trust remain part of the estate as do the assets in a TOD account and a will. Also, a will must be probated.*
71
True or False: When opening a partnership account, you must obtain the partnership agreement, a new account form signed by partners authorized to trade, a seperate new account form signed by all other partners and, a resolution.
False: The **new account form must be signed by those partners authorized to trade**, not by all other the partners. The others listed here are requirements.
72
What causes the value of a mutual fund's shares to fluctuate?
The value of a mutual fund's shares fluctuates along with the value of the securities in the fund's portfolio.
73
How is the value of mutual fund shares determined?
The value of shares is determined by formula, not by supply and demand.
74
What is the formula to calculate the NAV per share?
(total assets – total liabilities) / outstanding shares = NAV per share
75
How often must the NAV be calculated for a mutual fund?
The NAV must be calculated at least once per business day.
76
When is the NAV calculation typically performed?
Most funds calculate NAV once per day following the end of the trading day.
77
What are the liabilities of a mutual fund made up of?
The liabilities are made up of several expenses that the fund pays to maintain its operation.
78
What is a manager's fee in the context of mutual funds?
The cost of the investment adviser that makes day-to-day investment decisions for the fund's portfolio.
79
What types of costs are included in administrative costs for mutual funds?
* Trading costs
* Legal and accounting costs
* Transfer agent costs
* Other administrative expenses
80
What are 12b-1 fees used for in mutual funds?
12b-1 fees are used to pay for certain costs of distribution, often for advertising and paying trailing commissions to broker-dealers.
81
How is a mutual fund's expense ratio calculated?
The expense ratio is calculated by dividing a fund's expenses for a year by its average net assets for that same year.
82
What is the typical expense ratio range for stock funds?
Stock funds generally have expense ratios between 1% and 1.5% of a fund's average net assets.
83
What is the typical expense ratio range for bond funds?
For bond funds, the ratio is typically between 0.5% and 1%.
84
Does the expense ratio include sales charges or loads?
No, the expense ratio does not include sales charges or loads.
85
True or False: All mutual funds have expense ratios.
True
86
Benefits of mutual funds include all of the following except:
A) mutual funds can provide broad diversification inside a single fund.
B) reinvested dividends are not taxed until withdrawal.
C) mutual funds report distributions annually to investors.
D) mutual funds are professionally managed.
*B) reinvested dividends are not taxed until withdrawal.*
When dividends (or capital gains) are reinvested they are still taxed. All the other options are considered benefits of mutual funds.
87
have no sales charge levied at the time of purchase but rather levy a withdrawal from the customer's account every quarter, they would be most suitable for an investor intending to redeem the shares relatively soon
class c shares (level load)
88
* not regulated under the Investment Company Act and,
* no Securities and Exchange Commission (SEC) registration is required
hedge funds
89
DEF Growth Fund has net assets of $330 million and liabilities of $15 million. The fund has 10 million outstanding shares. NAV per share is:
$33.00,
NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question, the net assets are given; the liabilities are already in the figure. The math is 330 million / 10 million = $33 per share
90
Who can open and contribute to an IRA?
All employed individuals, regardless of whether they are covered by a qualified retirement plan through their employer.
91
What is the catch-up contribution amount for individuals aged 50 or older?
$1,000
92
How can married couples contribute to an IRA if one spouse has little or no earned income?
Contributions may still be made into an IRA for that spouse based on the couple's joint income.
93
What penalty applies to amounts contributed above the maximum limit in an IRA?
A 6% penalty every year until the excess amount is withdrawn.
94
Which investment practices are not allowed in IRAs?
* Short sales of stock
* Speculative option strategies
* Tax-exempt municipal securities
* Margin account trading
95
What is a custodian-to-custodian transfer in relation to IRAs?
A transfer of IRA assets from one IRA account to another IRA account, between matching types.
96
Is there a limit on the number of times a customer may transfer IRA assets?
No, there is no limit.
97
What is an indirect rollover?
When a customer withdraws and holds assets in their own bank or brokerage account, needing to deposit them into a qualified account within 60 days.
98
What must be deposited to avoid taxes and penalties in an indirect rollover?
The entire amount, plus the 20% withholding.
99
When may contributions to an IRA be deductible from earned income for tax purposes?
If the person is not covered by an employer-sponsored qualified retirement plan, they may deduct the full amount.
100
How does income affect the deductibility of contributions for individuals covered by an employer-sponsored retirement plan?
The amount that may be deducted varies with income, with the IRS setting a range where the deduction decreases as income increases.
101
At what age may distributions from an IRA begin without penalty?
Age 59½
102
What is the tax treatment of distributions from an IRA?
Generally added to ordinary income for tax purposes and fully taxable.
103
What penalty applies to distributions before age 59½?
A 10% penalty, in addition to regular income tax.
104
What is a Roth IRA?
A variation on the traditional IRA introduced in 1997, where contributions are not tax deductible.
105
What is a key advantage of Roth IRA distributions?
Distributions can be entirely tax free.
106
What is the return of the cost basis in a Roth IRA?
Distributions of the original contribution are tax free.
107
What happens to nonqualified distributions from a Roth IRA?
They are taxed as ordinary income and subject to a 10% penalty.
108
Who benefits most from a Roth IRA?
* Younger individuals (more tax-free growth years)
* Those in lower income-tax brackets
109
What defines a defined benefit plan?
It defines the benefit it will pay to retirees based on years of service, age, and salary at retirement.
110
What risk does a defined benefit plan place on the company?
The investment risk.
111
How do defined benefit plans from private employers differ from those from government agencies?
Private plans pay a fixed benefit; government pensions often include a cost-of-living adjustment (COLA).
112
What is a defined contribution plan?
Plans that define the amount that may be contributed, with employees having a balance to invest.
113
What is a key feature of defined contribution plans regarding investment risk?
The investing risk is carried by the employee.
114
What happens to assets in a defined contribution plan when an employee retires or changes employers?
Employees may take possession of the assets, often transferring them to an IRA.
115
What are some examples of defined contribution plans?
* 401(k) plans
* 403(b) plans
* Profit-sharing plans
* Money purchase plans
* SIMPLE plans
116
What is the prospectus delivery requirement period for new issues listed on an exchange or Nasdaq (NMS securities) in the aftermarket?
25 days
## Footnote
This period starts after the effective date.
117
What is the prospectus delivery requirement period for non-listed and non-Nasdaq (non-NMS) securities?
90 days
## Footnote
This period applies in the aftermarket.
118
What is the prospectus delivery requirement for an APO of NMS securities?
0 days
## Footnote
There is no requirement for delivery.
119
What is the prospectus delivery requirement period for an APO of non-NMS securities?
40 days
120
What is the purpose of the consent to loan agreement?
It gives the firm permission to loan the customer's margin securities to other customers or BDs for short sales
## Footnote
This form is optional but may be made mandatory by firms for margin customers.
121
Is the consent to loan agreement required by regulators?
No, it is not required by regulators
## Footnote
However, many BDs require this form.
122
What agreements must a customer sign to open a margin account?
The credit agreement and hypothecation agreement
## Footnote
The consent to loan agreement is optional.
123
What is the initial margin minimum deposit amount?
The higher of $2,000 or 50% of the purchase price
## Footnote
Initial margin requirements are set by Regulation T and FINRA.
124
What does FINRA specify for customers depositing in a margin account?
Customers must deposit $2,000 or 100% of the purchase price if it is less than $2,000
## Footnote
This ensures compliance with margin requirements.
125
What will customers always deposit in a margin account?
The higher amount of either Regulation T rule or FINRA rule
## Footnote
This is to ensure that the margin requirements are met.
126
What rating does Moody's assign to speculative, high yield bonds?
Moody's assigns ratings of Ba and below to speculative, high yield bonds.
127
True or False: Moody's speculative bond ratings indicate a higher risk of default.
True
128
Fill in the blank: Moody's uses a scale from _____ to _____ for its bond ratings.
Aaa (highest grade) to C (issue in default/lowest)
129
Which of the following is NOT a category in Moody's speculative bond ratings? A) Ba B) B C) Caa D) AAA
D) AAA
130
What is the significance of a bond rated B by Moody's?
A bond rated B by Moody's indicates a high risk of default but may still offer higher yields.
131
S&P Non-Investment Grade, Speculative Bond Ratings
* BB - fair, lower medium, some uncertainty
* B - fair, speculative
* CCC - speculative, weak
* CC - very speculative, marked weakness
* C - Extremely speculative, default likely, may have declared bankruptcy
* D - Issue in default
132
Most money market instruments are issued at _ and mature at _ .
a discount; par
133
True or false: Some negotiable CDs with longer maturities will pay interest every six months.
True: Most negotiable (Jumbo) CDs pay interest at maturity but some with longer maturities will pay interest every six months.
134
- often referred to as bill of exchange or letter of credit;
- short term time draft, normally between 1-180 days
- max term is 270
- used by corporations to help finance international trade
- always issued at discount
banker's acceptances (BAs)
135
= current yield
Annual coupon payment ÷ market price
136
sometimes called a *bond's basis*
YTM: takes into account the difference between the price that was paid for a bond and par value received when the bond matures
*purchased at a discount, the investor makes money at maturity;
purchased at a premium, the investor loses money at maturity*
137
What does M1 measure in the money supply?
M1 measures most readily available cash to be spent, including money in checking accounts.
## Footnote
M1 includes money closest to being spent and turned into economic activity.
138
What components make up M2 in the money supply?
M2 includes M1 plus consumer savings deposits, retail CDs, and short-term deposits.
## Footnote
M2 consists of assets that are easily moved to DDA accounts and spent.
139
What additional components are included in M3?
M3 includes M2 plus large time deposits, negotiable CDs, and multiday repos.
## Footnote
These assets are harder to move into a checking account.
140
What action can the FRB take to ease monetary policy?
The FRB can lower the discount rate, allowing consumers to borrow more easily.
## Footnote
This action frees up more money for member banks to lend to consumers.
141
What is the federal funds rate?
The federal funds rate is the rate that commercial-money-center banks charge each other for overnight loans of $1 million or more.
## Footnote
It serves as a barometer of short-term interest rates and is considered the most volatile rate in the economy.
142
What type of industry is heavy equipment classified as?
Heavy equipment is classified as a cyclical industry.
## Footnote
It tends to move in tandem with the business cycle.
143
How do precious metals behave in relation to the business cycle?
Precious metals tend to be counter cyclical.
## Footnote
Their demand often increases when the economy is weak.
144
What are defensive industries?
Food and fuel are considered defensive industries.
## Footnote
They are less sensitive to economic cycles.
145
How is EPS calculated?
EPS is calculated by dividing earnings available to the common shareholder by the number of outstanding shares.
## Footnote
The stock's current market value is not used in this calculation.
146
What happens to U.S. imports when the dollar is strong?
When the dollar is strong, U.S. imports increase as it becomes more affordable for consumers to buy foreign goods.
## Footnote
This leads to a balance of payment deficit.
147
What does a high acid test ratio indicate?
A high acid test ratio indicates a company can meet immediate liabilities without relying on inventory sales.
## Footnote
It reflects high current assets excluding inventory.
148
What is the effect of increased demand for a U.S. produced good on exports?
Increased demand for a U.S. produced good will increase exports, causing a deficit to shrink or a surplus to grow.
## Footnote
This reflects the relationship between supply and demand in international trade.
149
What type of indicator is the change in unemployment duration?
Changes in the duration of unemployment are a lagging indicator.
## Footnote
It reflects trends after economic changes have occurred.
150
What type of indicators are personal or household incomes?
Personal or household incomes are coincident indicators.
## Footnote
They move up and down along with the overall economy.
151
What type of indicators are equity prices and housing starts?
Equity prices and housing starts are leading indicators.
## Footnote
They tend to change before the economy as a whole changes.
