Practice Exams Flashcards
Mock and Practice Exams
Which of the following would most closely match the meaning of a “red herring”?
a. preliminary prospectus
b. registration statement
c. prospectus
d. tombstone advertisement
a. preliminary prospectus
A preliminary prospectus is also known as a “red herring”. The red herring does not include key information about the issue such as price and the number of shares offered. The term is derived from the disclaimer printed in red on the cover page.
The two classifications of chapters for corporate bankruptcies are I.liquidations II.reorganizations III.bankruptcy IV.failures
a. III and IV
b. II and III
c. I and IV
d. I and II
d. I and II
Corporate bankruptcies can be either liquidations, where assets are sold off and proceeds are distributed based on the priority of the claim, or reorganizations, where the company continues to operate under a plan to repay creditors.
The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105-½ is approximately
a. 6.5%
b. 7.1%
c. 8.2%
d. 7.5%
b. 7.1%
A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109%, or approximately 7.1%.
If an associated person is disciplined for violating SEC rules and regulations, and is ultimately suspended by the SEC, the member firm where the person is affiliated must report the suspension to
a. board of governors
b. exchange firm is member
c. state securities office
d. FRB
b. exchange firm is member of
An associated person may be disciplined for violating SEC rules and regulations. If a member firm suspends an associated person, the firm must report the suspension to the exchanges where the firm is a member.
A written customer complaint has been received by a broker-dealer, alleging that the customer’s signature was forged on a document. The broker-dealer must report this to FINRA
a. within 20 calendar days
b. promptly but no later than 30 days
c. promptly but no later than 10 business
d. within 5
b. promptly but not later than 30 calendar days
Normally, customer complaints will be handled within the firm to the satisfaction of both the customer and the firm, going to arbitration or the courts only if this proves impossible. Complaints alleging theft, misappropriation of funds, or forgery, however, must be reported to FINRA promptly but no later than 30 calendar days from receipt of the complaint.
In what order do the following economic phases typically occur? I.Recovery II.Trough III.Decline IV.Prosperity
a. IV, III, I, II
b. I, IV, III, II
c. II, I, III, IV
d. III, IV, I, II
b. I, IV, III, II
Expansion (recovery) is considered to be the beginning of the business cycle, followed by the peak (prosperity), contraction (decline), and trough.
Recovery - Prosperity - Decline - Trough
REPDT
A corporation sells shares to the investing public in order to raise capital. This is known as
a. primary, investor to investor, transaction
b. secondary market transaction
c. issuer transaction
d. exchange market execution
c. issuer transaction
The primary market is where securities are sold to the investing public by the issuer wishing to raise capital. These are known as primary market or issuer transactions.
Under the USA PATRIOT Act, financial firms must create and maintain records of wire transfers only
a. retail investors
b. bank customers
c. different state
d. 3k or more
d. 3k or more
Records of wire transfers of $3,000 or more must kept, regardless of their destination.
If a broker-dealer firm wishes to become a FINRA member firm, it must make its application
a. FINRA NAC
b. FINRA district office, applying firm has home office
c. SEC office nearest
d. MF act as applying firms sponsor
b. to the FINRA district office where applying firm has its home office.
An application to become a FINRA member firm must be made to the FINRA district office in the district where the applying firm has its home office.
A company is considering raising capital without going through the registration process requirements mandated by the Securities Act of 1933. To be exempt from the Act, which of the following offerings might they employ?
a. shelf offering
b. private (nonpublic) securities offering
c. initial public offering
d. additional public offering
b. private (nonpublic) securities offering
Issuers wanting relief (exemption) from the registration provisions of the Securities Act of 1933 can offer securities privately. These securities offerings are often called private placements.
A REIT can avoid being taxed as a corporation would by
a. receiving 75% or more income from real estate, distrusting 90%
b. receiving less than 50%, distributing 50%
c. receiving 100% of income from real estate, distribution 90%
d. receiving less than 75%, distribution 100%
a.receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders
Under the guidelines set by the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders.
Commercial paper is
a. secured debt with maximum maturity of 9 months
b. secured debt with max maturity of 1 year
c. unsecured debt with max 9 months
d. unsecured debt, max 1 year
c. unsecured debt with a maximum maturity of 9 months
Issued by corporations, commercial paper, also known as prime paper or promissory notes, are unsecured money market instruments with maximum maturities of 270 days (9 months).
With a discretionary account
a. customer may still enter orders
b. churning is permitted
c. customer may refuse trades done
d. pull power of attorney needed on file to grant discretion
a. customer may still enter orders
With a discretionary account the customer can continue to enter orders themselves. A trading authorization or limited power of attorney, not full power of attorney is required. The customer is bound to accept all trades done by the party given the discretion and churning, trades done only for the purpose of generating commissions, is never permitted.
If a company files for bankruptcy, which of the following investors would be most likely to be paid first?
a. preferred stock
b. debentures
c. mortgage bonds
d. common stock
c. mortgage bonds
Mortgage bonds are senior securities. Those who hold mortgage bonds expect to receive any assets from the dissolution of a bankrupt company before the holders of junior securities such as debentures and equity securities.
Recommendations regarding investment strategies under the “know your customer” (KYC) rule would NOT apply to recommendations to
a. buy, hold, sell common stock
b. make equity purchase in a particular market sector
c. buy or sell commodities
d. make purchase and sales intraday
c. buy or sell commodities
The definition of “investment strategy” does not include non-security investments such as commodities or fixed annuities. The term does apply to recommendations to invest in (buy), hold, or sell specific securities, as well as specific market sectors; trading, both long or short-term; or divesting of any asset or investment to make funds available to purchase securities.
Regarding filing for corporate bankruptcy, which of the following is TRUE?
a. reorganization means that property will be taken and sold to repay all debts
b. reorganization can occur after liquidation in corporate bankruptcy filing.
c. reorganization does not allow for continued operations to occur
d. liquidation means that property will be taken and sold to repay all debts
d. liquidation means that property will be taken and sold to repay all debts
The primary difference between a reorganization and a liquidation is that in a reorganization, the corporation can keep property and continue doing business. Liquidation means that all property will be taken and sold to repay all debts.
All of the following are considered unique or nonstandard corporate actions EXCEPT
a. takeover
b. merger
c. 3:1 stock split
d. tender offer
c. 3:1 stock split
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.
When a firm engages in proprietary trading, buying into and selling out of its own inventory for profit, it is acting as
a. an underwriter
b. market maker
c. agent
d. investment banker
b. market maker
When a broker-dealer buys and sells securities into and out of its own account as for the purpose of making a profit it is engaged in proprietary trading and is acting as a market maker (making markets in those securities). Investment banking and underwriting both primarily involve assisting issuers with bringing new securities issues to public investors. Agents act on behalf of others in the marketplace, such as a broker-dealer buying or selling for one of its customers.
An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a(n)
a. unit investment trust
b. custodian
c. investment company
d. fully disclosed firm
b. custodian
A person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another is known as a custodian. For example, the custodian for the account of a minor. This is different than a trustee who is a legally appointed entity. By contrast, anyone for example can open a custodial account for a minor as long as they are themselves an adult.
Which of the following statements is correct concerning currency risk when investing in an ADR?
a. currency risk is eliminated since securities are dollar denominated
b. US investors protected from currency risk by depositary bank
c. investors are protected from currency by underlying foreign
d. currency risk is still factor when purchasing an ADR
d. currency risk is still a factor when purchasing an ADR
ADRs are issued and pay dividends in U.S. dollars eliminating the complications of currency conversion. However, ADRs are still subject to currency risk. Why? The company pays dividends in its home currency, and the issuing bank pays out those dividends in U.S. dollars. When the exchange rate changes, the amount these dividends (in U.S. dollar terms) will fluctuate as well. Also, the value of the ADR itself will rise and fall with the value of the underlying foreign stock which is partially due to currency swings.
A registered representative is explaining discretionary and nondiscretionary accounts to a customer. Only one of the following statements is accurate and can be made by the RR. Which is it?
a. if decide account discretionary, no longer enter orders
b. discretionary - approve any order
c. nondiscretionary account no order can be entered without prior approval
d. decision - best interest
c. nondiscretionary account, no order entered without customers approval
In a nondiscretionary account no order can be entered without the customer’s prior approval. In a discretionary account the customer’s prior approval is not required. Only the customer can decide if the account should be a discretionary one and grants that discretion with a limited power of attorney giving trading authorization to the RR. Even in a discretionary account the customer may still enter their own orders.
A party wishing to solicit proxy authority to vote a particular stockholder’s shares must register with
a. NYSE
b. regional exchange where stock is traded
c. FINRA
d. securities and exchange commission
d. SEC
Any entity wishing to solicit proxies to vote a stockholder’s shares must register with the SEC.
an indication of interest given by investor during cooling off period is:
a. investor binding commitment
b. investor declaration of potential interest
c. investors declaration of potential interest after issued
d. investors binding
c. potential interest after issued
An indication of interest given by an investor during the cooling-off period is the investor’s declaration of a nonbinding potential interest to purchase some of the issue after the security comes out of registration (after the effective date).
Subject to market liquidity, which of the following orders is most likely to be executed immediately?
a. market order
b. fill or kill
c. all or none
d. limit order
a. market order
When a liquid market exists, buy or sell market orders are executed at the best available price immediately.
A customer receives a voting proxy from a broker-dealer for shares owned by the customer and held in street name. The customer returns the proxy but later decides to attend and vote at the shareholder meeting in person. The voting proxy
a. deemed, already counted
b. once signed not replaced
c. rescinded in writer
d. revoked, only vote at meeting count
d. revoked, only vote at meeting would count
A proxy is automatically revoked if the stockholder attends the shareholder meeting and votes. Additionally, a proxy is revoked if another is executed later.
In what order would claimants receive payment in the event of a corporate bankruptcy?
I.Holders of secured debt
II.Holders of subordinated debt instruments
III.General creditors
IV.Preferred stockholders
a. I, II, III, IV
b. IV, I, II, III
c. III, I, II, IV
d. I, III, II, IV
d. I, III, II, IV
For corporate bankruptcies, the liquidation priority is as follows: wages, taxes, secured debtholders, unsecured debtholders (including general creditors), holders of subordinated debt instruments, preferred stockholders, and common stockholders.
Which of the following retirement plans does not require minimum distributions once the participant has reached age 70½?
a. roth IRA
b. 401(k)
c. 403(b)
d. traditional IRA
a. Roth IRA
The Roth IRA has no specific requirement that the participant receive distributions. In all of the other plans, generally, upon reaching age 70 ½, minimum distributions must commence no later than the following April 1.
Which of the following regarding federal funds is TRUE?
a. these funds can provide intermediate term loans for FRB
b. funds may be loan from one FRB member bank to another
c. fund scan provide long term loans for FRB
d. funds are amount required held on reserve
b. these funds may be loaned from one FRB bank to another
Federal funds are the excess amounts above the amount of a bank’s deposits required to be held on reserve at the FRMember banks can lend these funds to one another to meet the FRB reserve requirements. These loans are very short term and, in most cases, are utilized overnight.
Under FINRA’s Code of Procedure, which of the following is NOT a sanction that could be imposed against a firm or registered person?
a. suspension of FINRA membership
b. jail sentence for an associated person of the firm
c. barring of an associated person
d. monetary fines
b. jail sentence
A jail sentence is not within the jurisdictional powers of FINRA. However, censure (generally meant to mean public disclosure), fines, suspension of the membership of a member or suspension of the registration of an associated person for a definite period, expulsion of the member (canceling the membership of the member), and the barring of an associated person from association with all members (essentially barring one from the industry) are all sanctions under FINRA’s Code of Procedure. Additionally, imposition of any other fitting sanction is specified. However, this would not include criminal penalties such as a jail sentence.
Which 2 of the following criteria, taken together, would cause a particular fact to be considered insider information under the Insider Information and Securities Fraud Enforcement Act of 1988?
I.It is personally embarrassing to the CEO of the corporation.
II.It is not known to the general public.
III.It could have a strong effect on the welfare of the corporation.
IV.It has only been reported in the industry’s technical journals.
a. II and III
b. I and III
c. I and IV
d. II and IV
a. II and III
To be considered insider information, a fact must not be known to the general public and must be material, meaning that if it were public, the company could be strongly affected (either positively or negatively). Personal embarrassment to the CEO by itself is not sufficient, and any publication, even in an obscure technical journal, constitutes disclosure to the public.
FINRA’s Conduct Rules regarding gifts and gratuities would permit a branch manager to
a. offer 2 tickets to PM if value not exceed 100
b. transfer ownership rights to luxury box
c. offer 2 tickets to all
d. invite manager see show together
d. invite PM see show together
A gift of tickets to a single event would be permitted under the Conduct Rules. A scenario where a representative of the firm accompanies the guest would fall under the heading of normal business dealings and the requirement that gifts be of no more than $100 in value is waived.
Some bonds have a feature that prohibits them from being called by the issuer before a certain date. This is known as
a. interest rate exposure
b. financial risk
c. call protection
d. capital risk
c. call protection
Some callable bonds have a feature known as call protection, which essentially limits the issuer from calling them in before a certain date. The length of the call is predetermined, and during this time, the investor knows that the bind cannot be called away.
All of the following SROs function under the SEC’s oversight EXCEPT
a. FINRA
b. msrb
c. cboe
d. FSLIC
d. FSLIC
Self-regulatory organizations (SROs) function under the SEC’s oversight. Each SRO is accountable to the Commission for enforcing federal securities laws, as well as supervising securities practices within an assigned jurisdiction. These include FINRA, MSRB, and the CBOE.
A registered person has left the securities industry and now holds a manufacturing job. Under what circumstances may this formerly registered person continue to receive commissions from work done at the person’s old firm?
a. once registered has left, treated like any member
b. person only receive from during employment
c. contract must be signed
d. must include provision
c.A contract must have been signed by the registered person and the firm specifying what commissions are still to be paid.
A registered person who has left the industry, whether through retirement or otherwise, is no longer registered and may not receive commissions for any new work from a FINRA member firm. If there are commissions from work done when the person was registered that have not yet been paid, they may be paid, provided that a written contract was signed by both parties specifying precisely what is due. The contract may, but is not required to, direct that continuing commissions be paid to the person’s spouse in the event of the formerly registered person’s death.
For a new issue that qualifies for Nasdaq listing, a prospectus must be provided to all purchasers within how many days after the effective date?
a. 90
b. 40
c. 25
d. 60
c. 25 days
For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is 25 days.
For nonlisted and non-Nasdaq securities, the period is 40 days. If the new issue will be specifically quoted on the OTCBB or the electronic OTC Pink, the period is 90 days.`
A 40-year-old individual is not covered by a retirement plan at work. What is the maximum contribution this individual can make to an IRA this year?
a. current max allowed by IRS, none deductible
b. current max, plus catch up , none deductible
c. current max by irs, all be deductible if not exceed income limit
d. nothing
c. current maximum allowed by IRS, which will all be deductible if the individual does not exceed income limit
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. The catch-up provision only applies to those age 50 or older.
An investor with no existing positions in MMS stock sells 100 shares. This is
a. short bearish position
b. long bullish position
c. long bearish position
d. short bullish position
a. short bearish position
With no other existing positions, this sale transaction would have to be opening a position. Sell to open a position = short = bearish.
Which of the following would cause a change in the net asset value of a mutual fund share?
I.Many shares are redeemed.
II.Securities in the portfolio are sold for a capital gain.
III.The fund pays a small dividend.
IV.The market value of the portfolio declines.
a. II and III
b. I and II
c. I and IV
d. III and IV
d. III and IV
Paying a dividend would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share. A decline in the market value of the portfolio would have the same effect. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged.
An income bond is
a. also known as an adjustment bond and unsecured
b. adjusted bond and secured
c. debenture and unsecured
d. debenture and secured
a. adjustment bond, unsecured
Income bonds or adjustment bonds are used when a company is reorganizing. The bonds only pay interest if the corporation has enough income to meet the obligations on the debt issue and are therefore unsecured.
The sales charge for Class A shares may NOT exceed
a. 6.25% of NAV shares purchased
b. 8.5% of NAV shares purchased
c. 6.25% of total investment
d. 8.5% of total investment
d. 8.5% of total investment
Though they are almost always much smaller, sales charges for Class A shares may not exceed 8.5% of the money invested. For example, if an investor spends $1,000 for Class A shares, no more than $85 may be charged as a sales load.
FINRA and the other SROs place extreme importance on knowing your customer. That involves knowing both financial and non- financial considerations. All of the following are non-financial considerations EXCEPT
a. clients age
b. number of children
c. clients attitude toward risk
d. salary paid and employer
c. salary paid to client by employer
Non-financial considerations are those for which there is no monetary relationship. Clearly, the client’s salary is one of the most important of the financial considerations.
An investor owns a bond purchased several years ago yielding 3%, which at the time was considered a fair return. However, these fixed 3% interest payments have not kept up with the inflation rate. This situation presents the investor with
a. purchasing power risk
b. currency risk
c. financial risk
d. liquidity risk
a. purchasing power risk
Inflation can generally be associated with diminished purchasing power—purchasing power risk. During times of inflation, a dollar will not be able to purchase what it had previously in the way of goods and services. Investments such as bonds paying fixed rates of return are negatively impacted during these times.
All of the following would be considered advantages of exchange traded funds as opposed to mutual funds EXCEPT
a. ETF are marginable
b. ETF priced continuously
c. ETF trade on exchange
d. ETF are commissionable
d. ETF are commissionable
Trading on exchanges, ETFs are priced throughout the trading day making them easy to trade and liquid. They can also be bought or sold on margin. The purchase or sale of ETF shares is a commissionable transaction. However, the commissions paid can erode the low expense advantage of ETFs and this would have the greatest impact when trading in and out of ETF shares frequently, or when investing smaller sums of money.
Which of the following features of preferred stock allows the holder to reduce the risk of inflation?
a. cumulative
b. callable
c. convertible
d. noncumulative
c. convertible
Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.
What might happen if a limited partner begins making day-to-day business decisions for the partnership?
a. no effect because LP right to vote
b. partner may be removed
c. partner might jeopardize LP status held as LP
d. partner may still maintain limited liability status held as an LP
c. partner might jeopardize the limited liability
While LPs can vote on overall business objectives, they cannot vote on any day-to-day operational business decisions. A limited partner having any control over the partnership’s day-to-day operations could be judged a general partner and lose LP status.
The options disclosure document must be provided
a. only if customer request to see it
b. at or before time of account approval
c. at time the confirmation for first transaction is delivered
d. before any discussions of options can occur with customer
b. at or before time of account approval
The options disclosure document (ODD) explains options strategies, risks, and rewards and is designed to provide full and fair disclosure to customers before they begin options trading. It must be provided at or before the time the account is approved.
An investor chooses to have a portfolio made up of domestically listed U.S. securities only. In so doing, this investor is primarily avoiding which of the following 2 risks?
a. market and purchasing power
b. inflation and interest rate
c. political and currency
d. calls and reinvestment
c. political and currency
By having a portfolio made up of only domestically listed U.S. securities, the investor is primarily avoiding political risk and currency risk. Political risk is attributable to political instability, rarely associated with U.S. domestic markets. Currency risk is most prevalent when buying or selling involves a foreign currency that can fluctuate in value against the U.S. dollar. While these 2 are avoided, the investor could still be exposed to each of the other risks listed here.
In order for a business entity to qualify as a limited partnership, the LP must have
a. any number of general partners and no limited partners
b. any number of limited partners only
c. at least one general and one limited
d. no general and at least one limited partner
c. at least one GP and one LP
Limited partnerships are required to have at least one general partner and one limited partner.
Firms applying for FINRA membership are required to agree to
I.be in compliance with all federal securities laws
II.pay dues, assessments, and other charges the associa¬tion levies
III.pass the appropriate qualification exam(s)
IV.attend a FINRA annual conference no less frequently that once every 3 years
a. I and II
b. II and III
c. II and IV
d. I and III
a. I and III
Firms must agree in their membership application that they will comply with all federal securities laws and make payment of dues and assessments when requested. Although qualification exams must be passed by individuals representing the firm, there is nothing requiring the firm itself to do so, nor is attendance at FINRA conferences required.
An allowable deduction to compensate for decreasing natural resources in an oil and gas DPP are known as
a. depletion allowances
b. tax credits
c. deductions for IDCs
d. depreciation deductions
a. depletion allowances
Tax deductions that compensate an oil and gas program for the decreasing supply of the resource after it is taken out of the ground and sold are known as depletion allowances.
After receiving a written complaint letter from a client, an RR should
a. employ a thorough investigation and provide a report to the SEC
b. turn complain over to appropriate supervisor or principal
c. contact client immediately
d. forward copies to FINRA or SRO
b. turn the complaint over to the appropriate supervisor or principal
Any representative receiving a written customer complaint is required to turn the complaint over to a supervisor or principal without delay.
All of the following are possible actions of an investor who has received stock rights EXCEPT
a. exercise rights to purchase the new stock at a discount
b. hold the rights for possible LT capital gain
c. sell rights for ST cap gain or loss
d. allow the rights to expire unexercised
b. hold the rights for possible LT capital gain
A long-term capital gain would require a holding period of more than 1 year. Rights expire 4 to 6 weeks after issue, so this would not be possible.
All of the following are considered control persons (owning control stock) EXCEPT
a. direct of BOD 2% outstanding shares
b. officer of corporation owning less than 1% o/s
c. CFO owning 1% o/s
d. unaffiliated shareholder owning 8% o/s
d. an unaffiliated shareholder owning 8% of the outstanding shares
By virtue of their positions, directors and officers are considered control persons and any stock they own, no matter how little, is considered control stock. To be considered a control person, an unaffiliated person would have to own 10% or more of the voting (outstanding) shares.
Which of the following offerings is most likely exempt from the registration requirements of the Securities Act of 1933?
a. private (nonpublic) securities offering
b. shelf offerings
c. additional public offerings
d. initial public offerings
a. private (nonpublic) securities offering
Public securities offerings must be registered under the Securities Act of 1933. These would include initial public offerings (IPOs), additional public offerings (APOs), and shelf offerings. Issuers choosing to offer securities privately may find relief (are exempt) from the registration provisions of the Securities Act of 1933.
In the dividend disbursement process three of the four critical dates are determined by the board of directors but one is determined by either FINRA for OTC stocks or the exchange for listed stocks. Which one is it?
a. payable
b. ex dividend
c. record
d. declaration
b. ex dividend
Declaration, record, and payment dates are determined by the board of directors (BOD), but FINRA, or the exchange, determines the ex-dividend date.
After the filing of a registration for a new issue with the SEC, and still in the registration’s cooling-off period, broker-dealers may
a. taking binding indications of interest
b. never publish tombstone
c. give red herring to prospective investors
d. distribute sales literature with preliminary prospectus
c. give red herring to prospective investors
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.
Selling shares not yet borrowed or located to be borrowed is
a. known as closing a position with sale, prohibited
b. known as short sale, prohibited
c. known as naked short sale, prohibited
d. closing short sale with purchase
c. known as a naked short sale and is prohibited
In order to open a position with a short sale, the shares to be sold must be borrowed or located to be borrowed first. Not doing so is known as selling short naked (naked short sale) and is prohibited.
Each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of
a. 20%
b. 4%
c. 2%
d. 1%
a. 4%
If a bond pays 2 interest payments of $20 each annually, this means that the total annual interest is $40. Annual interest ($40) divided by par ($1,000) equals the nominal, stated, or coupon yield (0.04 or 4%).
When Options Clearing Corporation receives a notice to exercise, it will assign that notice to
a. short broker dealer
b. party long the contract
c. long broker dealer
d. party short the contract
a. short broker dealer
The exercise and assignment process is as follows: A long customer notifies its broker-dealer (long broker-deal). The long broker-dealer notifies OCOCC then assigns the short broker-dealer, who will then in turn assign its short customer.
If a registered representative allows a customer to unknowingly buy investment company shares in an amount just under a dollar bracket that would qualify for a reduced sales charge, or encourages such a purchase, this is known as
a. short sale violation
b. market manipulation
c. markup violation
d. breakpoint sale violation
d. breakpoint sale violation
In a breakpoint sale, a customer unknowingly buys investment company shares in an amount just under a dollar bracket that would qualify for reduced sales charges. As a result, the registered representative receives a somewhat higher commission but the customer pays higher sales charges, reducing the number of shares purchased and resulting in a higher cost per share.
Which of the following would NOT be considered ordinary income for tax purposes?
a. dividends on c/s
b. gain from sale
c. salary and commissions
d. rents form income properties
b. gains gotten from sale of securities
Gains gotten from the sale of securities is an example of capital gains for tax purposes. All the others are considered ordinary income.
Margin calls can be met with deposits of
a. fully paid for marginable securities only
b. either marginable or non marginable securities
c. cash or fully paid for marginable securities
d. cash only
c. cash or fully paid for marginable securities
Margin calls can be met using either cash (100% of the call) or fully paid for marginable securities (twice the amount of the call because securities are only marginable to 50% of their value).
Which of the following regarding capital and money markets is TRUE?
a. capital markets provide short term financing
b. capital markets provide intermediate to long term financing
c. money markets provide intermediate to long term financing
d. money markets provide long term financing
b. capital markets provide intermediate to long term financing
The capital market serves as a source of intermediate to long-term financing.
The money market, on the other hand, provides short-term financing.
A call option reaches its expiration date and goes unexercised. This means
I.the buyer gains the premium paid
II.the buyer loses the premium paid
III.the writer gains the premium received
IV.the writer loses the premium received
a. II and IV
b. II and III
c. I and II
d. I and IV
b. II and III
Buyers of options pay the premiums for the contracts, and writers (sellers) receive the premiums. If the contract goes unexercised, the buyer loses the premium paid while the seller gets to keep it—a gain.
The primary regulatory body for the securities industry would be which of the following?
a. FINRA
b. FRB
c. MSRB
d. SEC
d. SEC
Created under the Securities Exchange Act of 1934, the overriding or primary securities industry regulatory body is the Securities and Exchange Commission (SEC).
All of the following unregistered persons may under certain circumstances receive commissions from a FINRA member firm EXCEPT
a. spouse of retired broker who is still owed commissions
b. suspended broker who recommends brokers firm for a transaction
c. retired broker who still has commission from preretirement
d. foreign nonmember ineligible for FINRA
b. a suspended broker who recommends the brokers firm for a transaction
Foreign nonmember firms and retired brokers (and their spouses in the event of their death) may all receive commissions from a FINRA member firm, provided specific requirements are met in each case. A suspended or expelled person, however, must always be treated like any non-FINRA member or member of the public.
An investor holding T-bonds will receive interest payments
a. monthly
b. semiannually
c. annually
d. biannually
b. semiannually
Treasury bonds (T-bonds) and notes (T-notes) pay interest on a semiannual basis.
An investor has purchased Class A mutual fund shares. The NAV (net asset value) per share of the fund is the price the investor
a. will use the cost basis in tax return filings once redeemed
b. knows will be the cost per share when order is entered
c. has paid for shares when purchased
d. will receive upon redemption of shares
d. will receive upon redemption of 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. Remember that for purchases and redemptions of mutual fund shares, the next calculated NAV per share is used, a practice known as forward pricing.
Therefore, when purchasing or redeeming shares, because mutual funds use forward pricing, the investor can never be certain of the exact price that will be paid or received when entering the order.
If long one equity call option, the owner
a) incurs an obligation to sell 100 shares of underlying stock
b) has right to sell 100 shares of underlying stock
c) incurs an obligation to purchase 100 shares of underlying stock
d) has the right to purchase 100 shares of underlying stock
d. has the right to purchase 100 shares of underlying stock
Equity options buyers have the right to purchase shares of the underlying security. One equity option contract represents 100 shares of the underlying security; therefore, the call owner has the right to purchase 100 shares of the stock.
At expiration, for those who trade call options, which of the following is TRUE?
a. call writers want the contract to be trading with intrinsic value
b. call writers want contract to be in the money
c. call buyers want the contract to be in the money
d. call buyers want the contract to be out of the money
c. call buyers want the contract to be in the money
At expiration for all options (calls and puts), buyers want the contracts to have intrinsic value—therefore, be in the money. Writers, on the other hand, want the contracts to be either at or out of the money and therefore have no intrinsic value.
Regarding political contributions, the Investment Advisers Act of 1940
a. mandates that no advisory services for a fee can be made to any government recipients for 10 years
b. allows contributions to be made to any party without possible loss of business
c. designed to deterring gaining political favor by employing what is known as “pay for play”
d. mandates that all contributions be made equally to all participating parties in an election
c. is designed to deter gaining political favor by employing what is commonly known as “pay to play”
The rule is designed to deter what is commonly called pay to play. It makes it unlawful for an adviser to receive compensation (fee) for providing advisory services to a government entity for a 2-year period after the adviser makes a political contribution to a public official of a government entity.
Regarding capital gains, which of the following is TRUE?
a. long term gains are those realized on positions held for 10 years or more
b. short term gain are those realized on positions held for 9 months or less
c. short term gain are those realized on positions held for 12 months or less
d. long term gains are those realized on positions held for 2 years or more
c. short term gains are those realized on positions held for 12 months or less
Profits on positions held 12 months or less are considered short-term gains. For those positions held longer than 12 months, the gains are considered long term and taxed at a more favorable rate.
MMS Corporation has 7% callable preferred shares outstanding. Over the past few years, benchmark interest rates have declined and hovered close to 3%. Which of the following is TRUE?
a. more 7% callable shares should be issued
b. issuer will convert shares to common stock
c. issue likely to reduce fixed dividend to 3%
d. 7% shares are likely to be called
d. the 7% shares are like to be called
When interest rates fall, callable preferred shares are likely to be called. This allows the issuer to cease the higher dividend payments and reissue shares with lower dividend payments that align more with the current interest-rate environment. With interest rates now at 3%, the issuer would have no desire to issue more 7% shares, nor could they reduce the fixed dividend on these 7% shares. If the shares were convertible, conversion would be at the discretion of the shareholders, not the issuer.
Regarding the purchase of new equity issues (IPOs), restricted persons may
a. not purchase shares of new issue
b. purchase shares of new issue only in amounts that are not substantial in relation to the total number of shares being issued
c. purchase shares of new issue only if they are employed by BD as RR
d. purchase shares of new issue only if they work for a bank
a. not purchase shares of a new issue
Persons characterized as restricted persons are prohibited from purchasing shares of new issues in any quantity. If one is already restricted, working for a bank or a BD does not exempt them from the rule.
Because common stock can be sold or given away, it is considered to be
a. voted by proxy
b. preemptive
c. limited in liability
d. freely transferable
d. freely transferable
Common stock is freely transferable to anyone who wants to buy it or receive it as a gift. In this regard, shareholders have the right to sell or give away their shares without permission of the corporation.
A registered representative enters a discretionary order for her clients account. All of the following are required EXCEPT
a. order must be identified or marked as discretionary
b. record of order must be maintained
c. order must be approved by principal prior to entry
d. order should be included in those required to review frequently
c. the order must be approved by principal prior to entry
Each discretionary order must be identified as such at the time it is entered for execution, a principal, officer or a partner of the BD must approve each order promptly and in writing, but not necessarily before order entry, a record must be kept of all transactions including discretionary ones, and as with all trading activity, it is subject to frequent and systematic review by a designated supervisor or manager.
Political risk is more associated with
a. developed economies but could occur even in emerging economies
b. emerging economies and can never occur in highly developed ones
c. developed economies and not with emerging economies
d. emerging economies, but could occur even in highly developed ones
d. emerging economies, but could occur in highly developed ones.
While political risk, the potential instability in the political climate of a country or market, is mostly associated with emerging economies, it must be recognized that it can occur even in highly developed ones as well.
If a customer’s Regulation T margin deposit is late, which of the following is TRUE?
a. the customer can apply to the bank where margin loan originated for an extensions
b. customer may apply to BD DEA for extension
c. BD apply to designated DEA for extension
d. BD can apply to bank for extension
c. BD may apply to designated DEA for extension
In the event of late margin deposit, requests for extensions are made by the broker-dealer to the firm’s designated examining authority (DEA).
In the event of late margin deposit, requests for extensions are made by the broker-dealer to the firm’s designated examining authority (DEA).
a. MF must always accommodate dealing with retail investors and not limit business
b. MF offer all types of investment products
c. MF required to be full service bd
d. MF never incorporate proprietary trading
b.Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options and others, or limit the products they offer to only a few
Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, and derivatives like options and others (be full service), or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise, they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors.
Which position has the greatest potential risk if the price of the underlying stock goes up?
a. long call
b. long put
c. short put
d. short call
d. short call
The greatest potential risk has to do with the maximum loss potential. If the market is rising, the greatest potential risk posed by an option position is a short naked call because the potential maximum loss is unlimited.
Member firms violate rules regarding sales of new equity issues to restricted persons when they do which of the following?
I.Sell a new issue to one of their own customers
II.Sell blocks of the new issue to accounts of partners or officers of the member firm
III.Sell shares to the grandparent of a member affiliate
IV.Sell to accountants or attorneys acting on behalf of the underwriters
a. I and IV
b. I and III
c. II and IV
d. I and II
c. II and IV
Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their immediate or supported family members. For purposes of this rule, aunts, uncles, and grandparents are not considered immediate family.
A commonality of all self-regulatory organizations (SROs) is that they all require their members and associated persons to
a. be incorporated in US
b. register with them
c. transact business with public
d. transact business with other
b. register with them
All SROs, such as FINRA, require member firms and associated persons to be registered with them. Some firms may transact business with other members, or the public, or both. There is no requirement that a member firm be organized as a corporation.
A customer wanting to open a margin account is told that the securities will be held in street name. This means that the securities will be registered in
a. name of customer and BD jointly
b. name of broker dealer
c. name of customer
d. name of bank supplying loan
b. name of broker dealer
Securities held in street name are registered in the name of the BD, who is the named or nominal owner. The customer remains as the beneficial owner.
All of the following statements are true EXCEPT
a. bond mutual fund may not issue bonds
b. closed end company may issue P/S
c. closed end company may issue bonds
d. bond mutual fund may issue bonds
d. bond mutual fund may issue bonds
A bond mutual fund invests in the bonds of other companies. It may not itself issue bonds or preferred stock. They can only issue common shares. Closed-end companies are much like any other company. They may issue bonds and preferred stock, once they have sold common stock and become a publicly traded company.
A member of the Federal Reserve System wanting to increase its reserves could do so by borrowing money from
a. FRB at federal funds rate
b. another FRB member bank at discount
c. another FRB at prime rate
d. FRB at discount rate
d. FRB at discount rate
A Federal Reserve Board member bank can increase its reserves by borrowing from the Federal Reserve Bank directly, or it can borrow from another FRB member bank. When borrowing from the FRB directly, a bank will pay the discount rate. When borrowing from another member bank, a bank will pay the federal funds rate.
Generally before borrowing from or lending to a customer, a registered representative must advise the firm in writing and receive written permission. Which of the following would be an exception to the written notice and approval requirement?
a. customer has business relationship with RR outside firm
b. customer has personal relationship with RR outside firm
c. both are employed and registered with same BD
d. customer is an immediate family member of rr
d. Customer is immediate family member of RR
There are two exceptions to the written notice and approval requirement for permitted lending arrangements between customers and RR’s. They are; when both are immediate family members or when the customer is a lending institution and the loan is a standard commercial lending transaction.
An investor owning 400 shares of stock receives notice that the stock will be split. When the split is complete, the customer owns 1,200 shares of stock. The split must have been
a. reverse, uneven split
b. forward, even split
c. forward, uneven split
d. reverse, even split
b. forward, even split
Because the customer ended up owning more shares, the split must have been a forward split. Because the number of shares was increased by an integral factor (3 in this case) the split was an even split. Three shares were received for every one previously owned.
An individual would most likely be statutorily disqualified from working in the securities industry for which of the following reasons?
a. conviction DUI
b. willful failure to disclose motor vehicle fine
c. conviction felonious assault
d. willful failure to disclose bankruptcy or unsatisfied lien
d. willful failure to disclose bankruptcy or unsatisfied lien
A willful misstatement or omission made on an application for membership or registration as an associated person is deemed a serious infraction of securities law that would likely lead to a statutory disqualification from the securities industry. The Form U-4 does not ask about motor vehicle fines per se. Felonies have to be disclosed, but not all felonies are statutory disqualifications.
Which of the following are methods of registering securities within a state? I.Registration by coordination II.Registration by qualification III.Registration by notification IV.Registration by application
a. III and IV
b. II and III
c. I and II
d. I and IV
c. I and II
States have two ways to register (or blue sky) securities: coordination and qualification. Notice filing is used solely for those securities that are referred to as federal covered, such as those listed on the NYSE, NASDAQ, or any national securities exchange and investment companies registered under the Investment Company Act of 1940. In this case, the states do not have jurisdiction over the registration requirements of these securities. However, the Uniform Securities Act does provide for states requiring a filing of a notice along with a filing fee to sell securities in that state.
If large money center commercial banks begin to lower their prime rates, which of the following is most likely to occur?
a. smaller banks offset lower prime rate by increasing broker call loan rate
b. smaller banks lower discount rate
c. smaller banks will lower lending rates to creditworthy customer
d. smaller banks increase lending rates
c. smaller banks lower lending rates
When large money center commercial bank lower the prime rate, the rate charged to their most creditworthy corporate customers, smaller banks will generally follow in order to stay competitive. The discount rate is set by the FRB (not banks), and if the broker call loan rate banks charge is impacted, it would also be lowered (not increased).
Considered the most volatile of the benchmark interest rates in the economy would be
a. prime rate
b. federal funds rate
c. discount rate
d. broker call loan rate
b. federal funds rate
The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates.
Each of the following investments and practices are deemed ineligible for an IRA or any other retirement plan EXCEPT
a. margin account trading
b. collectible fine art
c. variable annuities
d. life insurance
c. variable annuities
Annuities, variable or fixed, are in most cases acceptable investments appropriate for IRAs.
All of the following describe mutual funds EXCEPT
a. shares may be sold either on an exchange or OTC
b. carious withdrawal plans offered for redemption
c. fund simplify tax 1099 form
d. portfolio is professionally managed
a. shares may be sold either on an exchange or over the counter
Mutual fund shares are redeemable securities. Hence, they do not trade in the secondary market either on exchanges or over the counter. Instead, they may be purchased and redeemed only through the mutual fund company itself.
A preliminary prospectus is used to solicit
a. indications of interest before effective date
b. indications of interest before registration filing date
c. sales after effective date
d. sales before effective date
a. indications of interest before the effective date
A preliminary prospectus cannot be distributed before the registration date. Between the registration and effective dates, it is used to solicit or gauge indications of interest. After the effective date, sales can be solicited and a final prospectus would be available and must be used to do so.
Broker-dealers must comply with SEC rules and regulations when conducting business. A broker-dealer that does not comply may be subject to all of the following EXCEPT
a. prison sentence
b. censure
c. suspension
d. fines
a. prison sentence
Broker-dealers must comply with SEC rules and regulations when conducting business. A broker-dealer that does not comply is subject to censure, limits on activities, functions, operations, suspension of its registration (or one of its associated person’s license to do business), revocation of registration, and/or fines.
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?
a. mutual funds
b. rights
c. options
d. t-notes
d. t-notes
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.
All of the following information is required to be provided on the Form U-4 EXCEPT
a. disclosure of criminal arrest and charges
b. education
c. 5 year residency
d. 10 year employment
b. education
Although there is a place to disclose certain earned professional designations such as CPA and CFA, there is no requirement to disclose education (degrees or designations). Time spent as a full-time student however would be included in the 10-year employment history.
Subject to market liquidity, which of the following orders is most likely to be executed immediately?
a. limit order
b. fill or kill order
c. market order
d. all or none order
c. market order
When a liquid market exists, buy or sell market orders are executed at the best available price immediately.
An oil and gas DDP that invests in wells that are already producing is known as
a. tangible program
b. exploratory program
c. income program
d. leasing program
c. income program
An oil and gas DDP that invests in wells that are already producing is known as an income program. Exploratory programs are drilling new wells in search of new deposits.
A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are TRUE?
I.Nominal yield is higher than YTM.
II.Current yield is higher than nominal yield.
III.Nominal yield is lower than YTM.
IV.Current yield is lower than nominal yield.
a. II and IV
b. II and III
c. I and IV
d. I and III
b. II and III
The bond is offered with a YTM of 8.25%. Because the YTM is higher than the 8% coupon, the bond is trading at discount to par. For discount bonds, the nominal yield is lower than both the current yield and the yield to maturity.
The stated coupon on a bond is its
a. yield to call
b. basis
c. current yield
d. nominal yield
d. nominal yield
The coupon on a bond, also known as the “stated or nominal yield” indicates the annual interest paid. For example, a 4% bond pays $40 of interest per year (0.04 × $1,000 par).
An investor is long a January 30 call at 2. Maximum loss for this position is
a. 30
b. 320
c. 200
d. 280
c. 200
For any long option (call or put), the maximum loss potential is the premium initially paid—in this case, 2 points ($200).
A registered representative is discussing fee-based and commission based accounts with a customer. All of the following are true EXCEPT
a. fee base suitable low trading volume
b. disclosure of what services the fees cover in fee based before account open
c. fee based account charges single annual fee that can be fixed or percentage of assets under mgmt.
d. commissions bills for each transaction
a. fee based accounts are most suitable for those who do very little trading during the year
Fee-based accounts charging a fixed dollar amount or a percentage of assets under management are more suitable for those doing at least a moderate amount of trading. Commission based accounts charging for each transaction on the other hand are better suited for those who do fewer transactions each year. For fee-based accounts full disclosure of what is covered by the annual fee must be made before the account can be opened.
Broker-dealers who transact securities business with other BDs or customers must be registered with
a. FRB
b. SEC
c. OCC
d. FINRA
b. SEC
Any entity such as a broker-dealer intending to do business with other BDs or customers involving securities must be registered with the Securities and Exchange Commission (SEC).
U.S. government deposits securities with a trustee against which certificates are sold representing principal only with no regular interest payments. These are known as
a. t bonds
b. t notes
c. t receipts
d. t strips
d. treasury STRIPS
When the U.S. government deposits securities with a trustee, against which it issues certificates representing principal payments only, and no regular interest payments, these are known as Treasury STRIPS.
A balloon maturity for an issuer’s debt securities is most accurately described as
a. a later final maturity within a serial issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue
b. bonds comprising all of a particular issue that come due in a single maturity
c. a serial issue of bonds which interest periodically changes
d. obligation granting bondholder right to require issuer to purchase
a. a later final maturity within a serial issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue
A balloon maturity is generally distinguished from term bonds by the presence of serial maturities in the years immediately preceding the final maturity date. While some of the principal is paid back on the serial dates, the major portion of the principal is paid back on the final maturity date.
When interest rates in the open market move up or down, a bond’s coupon rate will
a. move inversely to open market interest rates
b. move with open market interest rats
c. be unaffected by open market interest rates
d. be adjusted to match open market rates
c. be unaffected by open market interest rates
Though the price of a bond will react to market forces, such as supply and demand, and be interest-rate sensitive (inverse), the coupon is always the same: A fixed percentage of par value established by the issuer when the bond was first issued.
A broker-dealer’s business model allows for only the purchase and sale of securities for retail customer accounts. It does not execute, settle, or clear its customer’s transactions, nor does it tend to any back-office functions such as sending trade confirmations or forwarding proxies. This broker-dealer would best be described as what type of firm?
a. full service
b. clearing / carrying agent
c. introducing / fully disclosed
d. market maker
c. introducing / fully disclosed
A fully disclosed “introducing” broker-dealer is what the word implies—it introduces its customer’s business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm’s back office.
All of the following are true regarding market indexes EXCEPT
a. track single stock rather than hypothetical ones
b. used to compare against performance of ones portfolio
c. demonstrate overall direction of market
d. performance standards investors can monitor
a. track single stock rather than hypothetical ones
Indexes such as the DJIA or the S&P 500 are hypothetical portfolios, not single stocks. While there’s no single standard or benchmark, an index can be used as a performance standard one can monitor and therefore judge the performance of a portfolio or investment against. When we refer to the stock market’s performance in general, we are most likely referring to the performance of an index or average that tracks stocks or bonds. These benchmarks can serve as an indicator of the overall direction of the market as a whole, or the direction of individual market sectors.
Options investors who are I.bullish on a stock should buy calls II.bullish on a stock should buy puts III.bearish on a stock should buy calls IV.bearish on a stock should buy puts
a. I and IV
b. I and III
c. II and IV
d. II and III
a. I and IV
Buying calls is bullish, and buying puts is bearish. Conversely, selling calls is bearish and selling puts is bullish.
Under the Uniform Securities Act (USA), state laws require that registered representatives must register in a state in which of the following circumstances?
I.The registered representative is a resident of the state.
II.The registered representative solicits business in the state.
III.The registered representative vacations in a state more than twice per year.
IV.The registered representative owns rental property in a state.
a. II and IV
b. I and III
c. I and II
d. II and III
c. I and II
State laws require that broker-dealers with an office in the state, or those that direct calls into the state or receive calls from the state, be registered in that state. Registered representatives must register in a state if they are residents or if they solicit business in a state.
An investor is long 1 May 35 call at 5. The 35 in this contract represents
a. strike price, price investor can purchase stock at
b. strike price, price investor has paid for contract
c. premium, price investor has paid
d. premium, price investor can purchase
a. strike price, the price investor can purchase stock at
For this contract, 35 is the strike price, which represents the price at which the investor has the right to purchase stock, and 5 represents the $500 premium paid for the contract.
A brokerage firm has accumulated a large holding in a little known company by purchasing several hundred thousand shares of the company’s stock. The firm instructs its RRs to begin touting the stock to every one of its customers and to make cold calls to new potential customers as well. This is most likely a scheme known as
a. pump and dump
b. marking the open
c. capping
d. pegging
a. pump and dump
A form of securities fraud commonly known as “pump and dump” is the act of inflating (pump) the price of an owned stock by perpetrating false and misleading positive rumors, in order to sell the stock at a higher price later. Generally the shares owned are first accumulated at lower prices before the misleading information is doled out to the investing public.
Which of the following is TRUE regarding general partners (GPs) in a limited partnership?
a. management decisions are not legally binding
b. may borrow from partnership
c. may compete with partnership
d. should participate in day to day management
d. should participate in day to day management of partnership
General partners have a fiduciary responsibility to manage the partnership in the best interest of the investors (partners). In doing so, they make decisions regarding all day-to-day management of the business. These decisions are, therefore, legally binding on the business. GPs may not, however, borrow money from or compete with the partnership.
Which of the following would be applicable to non-exempt securities (those that must be registered) being offered to the public by a corporate issuer? I.Securities Act of the 1933
II.Prospectus
III.Securities Act of 1934
IV.Secondary market
a. II and III
b. I and II
c. II and IV
d. III and IV
b. I and II
Offering non-exempt securities (those that must be registered with the SEC) such as common stock to the public requires the registration of the securities under the Securities Act of 1933. The offering must be made by prospectus.
A customer’s account has been frozen. Which of the following is TRUE if the customer wants to purchase more securities?
a. approval received
b. no new purchases
c. funds to pay in full must be available
d. funds can be borrowed
c. funds to pay in full must be available in account before order is entered
Purchasing securities in a frozen account is permitted, but the funds to pay for the purchase in full must be available in the account before the order can be entered.
At expiration, for those who trade put options, which of the following is TRUE?
a. put writers want the contract to be trading with intrinsic value
b. put buyers want the contract to be in the money
c. put buyers want to be out of the money
d. put writers want contract to be in the mone y
b. put buyer want the contract to be in the money
At expiration, put buyers (like call buyers) want the contracts to have intrinsic value and, therefore, to be in the money. Put writers (like call writers) want the contracts to be either at or out of the money and, therefore, have no intrinsic value.
Hypothecation is
a. closing securities position
b. opening in a margin account
c. pledging customer securities
d. replacing shares that were borrowed
c. pledging customer securities as collateral
Hypothecation is agreed to in the margin account agreement. The customer agrees to pledge the securities to be purchased on margin to the broker-dealer so that the broker-dealer can then pledge them to a bank as collateral for the margin loan.
To the benefit of the bondholder, a puttable bond is likely to be put back to the issuer
a. interest rates stable long period of time
b. interest rates fall
c. interest rates are volatile
d. interest rates rise
d. interest rates rise
Bonds with put features are most likely to be put back to the issuer when interest rates rise. For example, if a bondholder has a bond paying 4% and interest rates have risen to 6%, why settle for a 4% return when prevailing market rates are now up to 4%? Better to put the 4% bond back to the issuer for redemption and then purchase a new bond paying the prevailing higher rate. In this way, put features benefit the issuer.
If a registered representative is involved in a securities transaction outside the scope of employment with the firm, a practice known as “selling away,” and will receive compensation for it, which of the following must see that the representative is properly supervised for the transaction?
a. none
b. employing firm
c. FINRA examiner
d. firm where trade take place
b. employing firm
If a registered representative is to be compensated for a trade done through another firm, the employing firm must run the trade on its own books and see to it that the representative is properly supervised. The firm where the outside trade will take place is, of course, responsible only for the actions of its own registered representatives.
Which of the following securities carries the greatest amount of risk in conjunction with a corporate liquidation?
a. common stock
b. preferred stock
c. debentures
d. corporate bonds
a. common stock
Common stockholders are always the last to be paid in the event of a corporate liquidation and, therefore, have the most risk.
An investor owns MMS call options. This investor is
a. bearish, hoping stock will rise
b. bullish, hoping stock will rise
c. bullish, hoping stock will fall
d. bullish, hoping stock will fall
b. bullish, hoping stock will rise
Call owners have the right to purchase the stock. Being in a position to buy (own) the stock make them bullish. Bulls want stocks to go up.
Bonds can typically be issued with
a. term or balloon
b. term, serial, balloon
c. term, series, balloon
d. term or series
b. term, serial or balloon
The 3 types of maturities that bonds can typically be issued with are term, serial, or balloon maturities. Note that there is no “series” maturity type.
An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity
a. will be low, reflecting low price paid
b. is unaffected
c. increases
d. decreases
c. increases
A $1,000 par value bond purchased at $725 is bought at a discount to par. Whenever a bond is purchased for an amount less than will be received at maturity ($1,000 par), the discount initially paid increases the return. In other words, in addition to receiving the coupon interest payments, the investor will also receive at maturity an additional $275 more than the $725 paid when the bond matures.
Different categories of preferred shares offered by an issuer
a. must all be convertible
b. all have same fixed dividend rate.
c. must all be callable
d. all have preference over issuers common stock
d. all have preference over issuers common shares
Separate categories of preferred shares may differ in several ways, including dividend rate and profit participation privileges. However, all maintain preference over common stock shares issued.
Which of the following is acceptable in a broker-dealer firm’s relations with its customers?
a. firm offers to replace investment loss for customer long standing
b. firm reimburses customer for loss due to clerical error
c. firm offers to shares risk
d. firm make up expected gain
b. firm reimburses for clerical errors
A broker-dealer firm is there to provide a service. It may not enter into guarantees of profits, sharing of risk, or protection from loss for a customer, unless the loss is due specifically to an error by the firm.
A written promise made by a corporation to pay the principal at its due date and interest on a regular basis on one of its debt issues but backed by no physical assets or titles to assets could only be
a. collateral trust
b. mortgage
c. debenture
d. equipment trust
c. debenture
A debenture is a debt obligation of a corporation backed only by its word and general creditworthiness. Debentures are written promises of the corporation to pay the principal at its due date and interest on a regular basis.
Partners in direct participation leasing programs can receive write-offs for all the following EXCEPT
a. depreciation
b. interest expenses
c. depletion
d. operating expenses
c. depletion
Write-offs (deductions) associated with leasing programs are those taken for operating expenses, depreciation of the equipment owned and leased, and interest costs on the loans to purchase the equipment. Depletion, however, is a deduction associated with natural resources programs, such as oil and gas.
Under what circumstances could a member firm holding stock in street name vote the shares as it sees fit?
I.If the customer signs and returns a proxy statement but does not indicate how to the shares are to be voted
II.If the customer does not return the signed proxy statement by the 10th day before the shareholders’ meeting
III.If the matters to be voted on are of major importance
IV.If the matters to be voted on are of minor importance
a. I and III
b. I and IV
c. II and IV
d. II and II
c. II and IV
A member firm holding stock in street name may vote the shares as it sees fit if the customer does not return the signed proxy statement by the 10th day before the shareholders’ meeting, and if the matters to be voted on are of minor importance. If the matters are of major importance (such as a change in the direction of the business or a merger or acquisition), the shares are simply not voted.
A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond?
a. single
b. balloon
c. term
d. serial
c. term
Term bonds are structured so that the principal of the entire issue is all payable on the same date—the maturity date.
The maximum potential loss for an investor short a put option is
a. unlimited
b. strike plus premium
c. premiums
d. strike - premium
d. strike - premium
Short puts are bullish. In wanting the stock price to rise, one’s risk is that the stock falls in price below the breakeven point. The maximum loss occurs if the stock falls to zero. Therefore, the maximum loss on a short put is equal to the breakeven (strike price minus premium for puts).
An investor and his mother own 20% and 10%, respectively, of a corporation’s outstanding shares, and the mother wants to sell all of her holdings. According to Rule 144, which of the following statements are TRUE?
I.She must file Form 144 to sell the shares
II.She does not have to file Form 144 to sell the shares.
III.She is considered an affiliated person.
IV.She is not considered an affiliated person.
a. II and III
b. I and II
c. II and IV
d. I and IV
b. I and III
Rule 144 defines an affiliate as one who is in a control relationship with an issuer. Because the investors’ combined ownership is at least 10% of the stock, they are control persons under Rule 144 and in order to sell, the mother must do so in compliance with the rule.
Which of the following records must be kept for the life of a broker-dealer firm?
a. general ledger
b. forms u4 and u5
c. customer ledgers
d. stock certificate books
d. stock certificate books
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 6 years, and forms U-4 and U-5 regarding the firm’s associated persons need only be kept for 3.
An investor purchases a T-bill for $9,925 that will mature at $10,000. The difference between the $9,925 paid and the $10,000 that will be received is
a. discount par, considered interest received at maturity
b. discount par, capital gain
c. premium above, dividends received
d. premium above, interest received
a. the discount at par considered interest received at maturity
T-bills are purchased at a discount to par. In this case, it is bought at $9,925, which is a $75 discount to the $10,000 par value to be received at maturity. Debt instruments pay interest not dividends, and the $75 difference between what was paid and what will be received is considered the interest paid on the T-bill at maturity.
Section 529 plans are considered municipal fund securities. They must therefore be sold by
a. investment letter
b. offering circular
c. security memo
d. prospectus
b. offering circular
Municipal bonds are sold by offering circular, a document similar to a prospectus used in the sale of municipal securities. Because Section 529 plans are state sponsored, they must be sold by offering circular.
Regarding different types of risk, which of the following is TRUE?
a. changes in regulation represent legislative risk
b. changes in regulations represent political risk
c. enactment of , or change in , laws represent political risk
d. enactment of, or changes in law, represent legislative risk
d. enactment of, or changes in laws, represent potential legislative risk
The enactment of, or changes in, laws represent potential legislative risk, whereas enactment of, or changes in, regulations represent regulatory risk. Political risk is specific to potential political instability associated more with emerging economies.
Which of the following securities provides U.S. investors with a way to gain exposure to the common stock of a foreign issuer?
a. ADR
b. CMO
c. STRIP
d. GNMA
a. ADR
ADRs are a type of equity security that simplify foreign investing for Americans. An ADR is created when common 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 trades in the U.S and is denominated in U.S. currency. A GNMA is a type of mortgage-backed security. A CMO is a mortgage-backed derivative. A STRIP is a zero-coupon Treasury security.
What are the 2 basic types of return on an investment?
a. interest and principal
b. dividends and interest
c. capital gains and income
d. short term and long term
c. capital gains and income
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.
Regarding options positions, which of the following statements is TRUE?
a. call buyer have the right to purchase, put buyers have the right to purchase
b. call rights have right to sell, put writers are obligated to sell
c. call buyers have right to purchase, put writers obligated to purchase
d. call writer obligated to purchase, put writers obligated to sell
c. call buyers have the right to purchase the underlying, and put writers may be obligated to purchase underlying
Buyers of options have rights, and writers (sellers) of options may be in an obligatory positon if the buyer exercises the contract.
Call buyers have the right to purchase stock, and put buyers have the right to sell stock.
Call writers may be obligated to sell the stock, while put writers may be obligated to buy the stock.
What is the “spread” on a stock quote?
a. profit margin for an individual trade
b. range of prices the stock has shown over the course of one trading day
c. difference between the bid price and ask price or offer
d. broker dealers commission charges for transaction
c. the difference between the bid price and ask price or offer
A quote consists of a bid and an ask price. Dealers post their bid price—the price they are willing to pay for a stock—and their ask price—the price at which they are willing to sell the stock. The spread is the difference between the 2.
Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days?
a. 4
b. 3
c. 6
d. 1
d. 1
Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks’ trading volume (whichever is greater), every 90 days
Which of the following is an unsecured debt instrument?
a. collateral trust certificates
b. junior lien mortgage bonds
c. equipment trust certificates
d. debentures
d. debentures
Corporate debentures are unsecured bonds backed by the good faith and credit of the issuing corporation; they are not secured by any underlying collateral.
Your firm must provide a privacy notice describing its privacy policies to customers
a. only when customer indicates changes
b. whenever new account is opened and annually after
c. every third year after account has be opened
d. whenever new account is opened only
b. whenever new account is opened and annually thereafter
Privacy Notifications under Regulation S-P must be provided to customers whenever a new account is opened and annually thereafter.
Restricted persons are not allowed to purchase an IPO of common stock. All of the following are restricted persons EXCEPT
a. broker dealers
b. any person owning 10% or more
c. registered representatives
d. grandparent of restricted
d. grandparent of restricted
Immediate family to a restricted person is a restricted person. This includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support. Aunts and uncles as well as grandparents are not considered immediate family. If, however, one of these individuals lives in the same household as a restricted person, that individual would be a restricted person.
Which of the following settlement arrangements has trade and settlement occurring on the same day?
a. sellers option
b. cash settlement
c. buyers option
d. regular way settlement
b. cash settlement
If both parties to the trade agree, and if the buyer has the cash on hand and the seller has the securities on hand, trade and settlement can take place on the same day. This is known as cash settlement.
Which of the following describes the results of a 1 for 2 reverse stock split?
a. twice as many, same price
b. twice as many, half price
c. half as many, twice price
d. half as many, same price
c. half as many shares at twice the original price
If a stock price has become too low, for example for listing to continue on an exchange, a corporation may carry out a reverse stock split. In a 1 for 2 reverse split, the price of the stock is doubled, but the number of shares outstanding is halved. Any stock split, forward or reverse, must leave the total value of the outstanding stock unchanged before and after the adjustment.
Economists call mild, short-term contractions
a. recessions
b. depressions
c. declines
d. troughs
a. recessions
Economists call mild, short-term contractions recessions. Longer, more severe contractions are depressions.
A customer has been found in violation of freeriding. As a penalty which of the following will occur?
a. cash or marginable securities must be in account for all purchases made for life
b. only closing transactions can be entered
c. frozen for 10 days
d. frozen fore 90 days
d. The account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made.
As a penalty for freeriding, an account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made.
A corporation is issuing a bond with an interest rate below that which is commonly being offered for this type of bond. To improve the bond’s marketability without reducing the capital to be obtained, which of the following actions might the corporation take?
a. offer stock dividend to current shareholders
b. conduct rights offering for potential buyers
c. offer warrant on stock with each bond
d. offer bond at a discount
c. offer a warrant on stock with each bond
Warrants are sometimes offered as “sweeteners” attached to bond issues to improve the marketability of bond.
Rights offerings and stock dividends do not apply in this case, and selling the bonds at a discount would be self-defeating because the issuer wouldn’t be able to raise the needed capital.
Which of the following incur a fiduciary responsibility in a limited partnership?
a. both GP and LP
b. LP
c. GP
d. each individual partnership investor
c. the general partners
It is the investors in an LP who are the partners. Only the general partners, however, incur a fiduciary responsibility to run the partnership and use the invested capital in the best interest of all the investors (partners).
Downturns in the business cycle or economic contractions are characterized by all of the following EXCEPT
a. higher consumer debt
b. rising bond defaults
c. rising bankruptcies
d. falling inventories
d. falling inventories
When the economy is contracting, inventories tend to rise (not fall) due to a decreasing demand for goods.
If a broker-dealer holds the stock of an investor in street name, which of the following must be forwarded to the investor promptly upon receipt?
I.Articles about the company found in financial industry literature
II.Proxy statements relating to upcoming shareholder meetings
III.Changes in the credit status of the issuing corporation
IV.Quarterly financial and other reports generated by the issuer
a. II and III
b. I and III
c. I and IV
d. II and IV
d. II and IV
Stock a broker-dealer holds in street name will be the subject of financial reports, proxy statements, and other material generated by the issuer that is important for the investor, the beneficial owner of the stock, to have. Accordingly, the broker-dealer must forward the material to the investor promptly.
An investor owns a bond purchased several years ago yielding 3%, which at the time was considered a fair return. However, these fixed 3% interest payments have not kept up with the inflation rate. This situation presents the investor with
a. liquidity risk
b. purchasing power risk
c. financial risk
d. currency risk
b. purchasing power risk
Inflation can generally be associated with diminished purchasing power—purchasing power risk. During times of inflation, a dollar will not be able to purchase what it had previously in the way of goods and services. Investments such as bonds paying fixed rates of return are negatively impacted during these times.
Class C mutual fund shares are also known as
a. successive load shares
b. periodic load shares
c. intermediate shares
d. level load shares
d. level load shares
Class C mutual fund shares have no sales charge at the time of purchase, but have a percentage of their value withdrawn from the customer’s account every quarter. The percentage, which can be as high as 0.75% of the value of the account, never ceases. The charge remains as long as the account does—it remains “level”—hence, the shares are known as level-load shares.
bank issues and guarantees certificates of deposit, and those that are negotiable are considered money market instruments. What makes a CD negotiable?
a. backing by banks good faith and credit
b. short term maturity
c. fixed interest rates
d. secondary market trading
d. secondary market trading
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.
Promissory notes are a form of
a. treasury note issued by US gov
b. treasury bill issued by US gov
c. jumbo CD issued by bank
d. commercial paper issued by corporations
d. commercial paper issued by corporations
Corporations issue short-term, unsecured commercial paper, known as promissory notes. The proceeds from these notes are generally used to fund such items as pending accounts receivable and seasonal inventory gluts.
According to the U.S. Commerce Department, the economy is in a depression when a decline in real output of goods and services lasts
a. 18 months or more, 6 quarters
b. 9 more or more, 2 quarters
c. 6 months or more, 2 quarters
d. beyond 12 months, 4 quarters
a. 18 months or more, 6 quarters
The U.S. Commerce Department defines a depression as a decline in real output of goods and services lasting 18 months or more (6 quarters).
Which of the following is a debt instrument that pays no periodic interest?
a. treasury bond
b. corporate bond
c. treasury note
d. treasury strip
d. treasury strip
STRIPS are Treasury bonds with the coupons removed. With no coupons, STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.
An investor is convinced that CDT stock will soon decline in value for a number of reasons. Which investment strategy will allow the investor to take advantage of the anticipated decline in share value with the smallest cash investment?
a. purchase a call option
b. purchase a put option
c. purchase a call spread
d. sell company’s stock short
b. purchase a put option
Purchasing a put is a basic option strategy utilized when one is bearish on a stock. If the stock declines as anticipated, the investor could exercise the right to sell the stock at the strike price and then repurchase it at its lower current market price for a profit. The premium paid to buy the put costs less than the margin required if one were to sell the stock short. Purchasing a call or a call spread are bullish options strategies.
Treasury bonds mature in
a. 1 year ore more
b. 10 years or more
c. less than 2 years
d. 2 years or more
b. 10 years or more
Treasury bonds (T-bonds) are the U.S. government’s long-term debt instrument having maturities of 10 years and up to 30 years.
Which of the following would be considered excessive transactions?
a. RR places a customers securities into firms investment account
b. customer orders 100 shares, RR places order for 200
c. RR buys and sells same security for customer 3x in a day
d. customer order 5000 shares OTC, RR orders 100 shares for himself before placing customers order
c. RR buys and sell same security for customer three times during single day
Without further information, it would seem likely that trading the same security 3 times in one day would be viewed as excessive trading. Purchasing the incorrect amount, commingling and front-running are prohibited practices, but are not classified as churning (excessive transactions).
Which of the following is not a category of communications with the public designated by FINRA?
a. retail
b. correspondence
c. institutional
d. market letters
d. market letters
The three categories of communications with the public designated by FINRA are retail, correspondence, and institutional. Market letters, as all sales or advertising pieces would, can fall under any of the three communications categories depending on to whom they are sent or made available to, and the number of recipients.
Regarding the registration statement filed with the SEC when new securities are to be issued, all of the following are true EXCEPT
a. names, address, company officers, salaries, 5 year business history
b. accuracy and adequacy of registration is responsibility of underwriters
c. description of how proceeds raised from sale, disclosed
d. underwriters may assist issuer in preparing and filing the registration statement
b. the accuracy and adequacy of registration documents is the responsibility of the underwriters
While underwriters (broker-dealers and investment bankers) may assist the issuer in preparing and filing the registration statement, the accuracy and adequacy of the registration documents is the responsibility of the issuer. Full disclosure is also made on a number of issues, including but not limited to names and addresses of company officers and a description of how the sale proceeds will be used.
Call risk is most closely associated with
a. reinvestment risk
b. currency risk
c. market risk
d. financial risk
a. reinvestment risk
Call risk is the risk that a bond might be called before maturity. Often when this occurs, investors who receive their principal back sooner than anticipated are left to find ways to reinvest that will achieve the same returns—reinvestment risk.
A customer of a securities firm has concluded that selling short would be an effective trading technique to reach his investment goals. Assuming the firm’s principal agrees to permit the customer to effect short sales, what type of account would be most suitable for short selling?
a. IRA
b. fiduciary account
c. cash account
d. margin account
d. margin account
Investors who choose to sell short eligible securities must satisfy Federal Reserve Board (FRB) margin requirements to do so. The margin requirement is a deposit of 50% of the sale proceeds in the customer’s margin account.
A company’s board of directors (BOD) approves a dividend payment. When this occurs it is recognized as the
a. declaration date
b. dividend disbursement note
c. record date
d. ex dividend date
a. declaration date
When a company’s board of directors (BOD) approves a dividend payment it is recognized as the date the dividend was declared; declaration date.
For real estate program partners, tax deductions will be derived from
a. government assisted housing allowances
b. mortgage interest paid and depreciation
c. income received from rents
d. historical rehabilitation credits received
b. mortgage interest paid and depreciation
Deductions for real estate programs come primarily from mortgage interest paid on the properties and the depreciation allowable for the properties.
Which of the following would NOT require delivery of notice?
a. an interest payment on corporate bonds
b. a rights offering
c. a 2:1 stock split
d. payment cash dividend
a. an interest payment on a corporate bond
Stockholders must receive notice from the issuer in the event of actions to shareholders, chiefly those that are unscheduled or unpredictable. Some examples are stock splits, dividend payments, and rights or warrant offerings. A scheduled interest payment on a corporate bond thus does not require delivery of notice.
An investor is long 300 shares of MAS at 45. The stock has just undergone a 3:1 split. The investor’s new position is
a. long 100 shares at 45
b. long 100 shares at 15
c. long 900 shares at 15
d. long 900 shares at 45
c. long 900 shares at 15
The split is a “forward” split, which means the number of shares increases, while the price decreases. At 3:1, the number of shares goes up by a factor of 3 and the price goes down by a factor of one-third (i.e., to one-third of its previous value). The rule is that the total value of the position must remain unchanged before and after the adjustment. In this case, the original position’s value was 300 shares × $45, or $13,500. The new position is valued at 900 × $15, which is also $13,500.
A broker-dealer that executes trades and settles transactions for another broker-dealer is called a
a. carrying firm
b. limited broker dealer
c. fully disclosed firm
d. introducing firm
a. carrying firm
Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing, or fully disclosed firms.
A registered representative with discretionary authority has been doing two or three trades per week in her customer’s discretionary account. The volume of transactions is not in keeping with the historic activity in the account and the trades don’t all align very well with the account objectives. A principal noted that other than generating commissions, the trades seem to have little profit potential. This is likely a red flag for
a. freeriding
b. front running
c. market manipulation
d. churning
d. churning
Excessive trading in a customer’s account to generate commissions rather than to help achieve the customer’s stated investment objectives is an abuse known as churning. This can occur in both discretionary and nondiscretionary accounts
Which of the following activities constitute pegging? I.Immediate repurchase of a security, purchased some time ago and just sold at a loss
II.Multiple purchases a security during a down market to keep it from falling
III.Two investors trading a security back and forth several times within one day
IV.Protecting a short call option from being exercised by placing sell orders during the day in the underlying stock
a. II and III
b. I and II
c. II and IV
d. I and IV
c. II and IV
- Multiple purchases during down market
- protecting short call option
Any action to fix or stabilize the price of a security is pegging. Choice II would keep the price up, which would protect the holder of a long position; this is known as supporting. Choice IV would keep the price down, which would protect the holder of a short call; this is known as capping. Both constitute pegging.
Which of the following is the best description of a limited partnership?
a. investment that allows only for income to flow through to investors
b. investment that permits both gains and losses to pass through to investors
c. investment that exempts individual investors from reporting gains and losses
d. investment that allows for losses only to pass through as write offs to investors
b. an investment that permits both gains and losses to pass through to the investors
LPs are investment opportunities that permit the economic consequences of a business to flow or pass through to investors (limited partners). These would include the consequences of both income received and losses incurred.
A customer believes the price of MJS stock will rise but is not currently in a position to purchase the stock outright. How could the customer use options to profit from a rise in the stock's price? I.Buy calls II.Write calls III.Buy puts IV.Write puts
a. II and III
b. II and IV
c. I and III
d. I and IV
d. I and IV
- buy calls, write puts
The investor believes the stock’s price will rise and therefore is bullish. Buying calls and writing puts are bullish strategies, while buying puts and writing calls are bearish strategies.
A broker-dealer’s business model allows for only the purchase and sale of securities for retail customer accounts. It does not execute, settle, or clear its customer’s transactions, nor does it tend to any back-office functions such as sending trade confirmations or forwarding proxies. This broker-dealer would best be described as what type of firm?
a. clearing agent / carrying agent
b. introducing/ fully disclosed
c. full service
d. market making
b. introducing / fully disclosed
A fully disclosed “introducing” broker-dealer is what the word implies—it introduces its customer’s business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm’s back office.
Economic reports show that there is a general rise in prices for consumer goods and a high unemployment rate occurring simultaneously. This combination can best be described as
a. stagnation
b. deflation
c. inflation
d. stagflation
d. stagflation
Stagflation is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy isn’t growing (there is a lack of consumer demand and business activity), yet prices for goods are still rising.
Treasury bonds pay interest
a. at maturity and at current market value
b. monthly and mature at current market value
c. semiannually and mature at par value
d. annually and mature at par value
c. semiannually and mature at par value
Treasury bonds (T-bonds) and notes (T-notes) both pay interest semiannually and mature at par value.
Regarding corporate bond issues, which of the following statements best describes secured debt and unsecured debt?
a. only secured debt can be issued by corporation, unsecured debt cannot be
b. unsecured debt is asset back, while secured debt is backed by issuers full faith or credit
c. secured debt is asset backed, unsecured debt is not
d. only unsecured debt can be issued by corporations, while secured debt cannot be
c. secured debt is asset backed, while unsecured debt is not
Corporations can issue both secured and unsecured debt securities. Secured debt issues are backed by real assets, while those that are unsecured are simply backed by the issuer’s full faith and credit.
Margin calls can be met with deposits of
a. either marginable or non marginable securities
b. fully paid for marginable securities only
c. cash only
d. cash or fully paid for marginable securities
d. cash or fully paid for marginable securities
Margin calls can be met using either cash (100% of the call) or fully paid for marginable securities (twice the amount of the call because securities are only marginable to 50% of their value).
A broker-dealer wants to give an employee of another firm a gift. This is permitted provided all of the following conditions are met EXCEPT
a. gift employing firms prior approval
b. gift not exceed 100
c. gift or compensation is preapproved by firms SRO
d. gift is not conditional on sales
c. the gift or compensation is preapproved by firms SRO
Firms may not distribute gifts, gratuities, or compensation to the employees of other member firms unless the compensation is not conditional on sales or promises of sales, it has the employing member’s prior approval, and the compensation’s total value does not exceed the annual limit of $100 per person. Approval of the self-regulatory body the firm reports to is not a requirement or condition.
Members and non-members alike can look into a broker’s service and qualifications record by accessing which of the following services?
a. CRD
b. MSRB
c. form u-4
d. brokercheck
d. brokercheck
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.
A company reorganizing with the intent to emerge from a bankruptcy is likely to issue which of the following type of bonds to accomplish that goal?
a. adjustment bonds
b. mortgage bonds
c. debentures
d. subordinated debt
a. adjustment bonds
Income bonds, also known as adjustment bonds, are used when a company is reorganizing. These bonds allow the issuer to only pay interest if the corporation has enough income to meet the interest payment obligations. This allows the corporation some flexibility while attempting to reorganize and emerge from bankruptcy.
A certificate stating a borrower’s obligation to pay back a specific amount of money on a specific date to an investor is
a. bond or stock power
b. ownership certificate
c. stock certificate
d. bond
d. bond
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.
Anyone who, as part of their business, gives investment advice for compensation must register as a(n)
a. agent for issuer
b. stock broker
c. underwriter
d. investment adviser under the investment adviser act of 1940
d. investment adviser under investment adviser act of 1940
Broker-dealers who provide advice for a fee are subject to registration under this 1940 IA Act. Agents of investment advisers must register and pass a qualification examination.
An investor purchased an MJS corporation 6% 20-year bond at issue for $950. Two years later, the investor sold the bond for $925. This investor experienced
a. 925 return on investment
b. 25 capital loss
c. 25 interest loss
d. 25 return on investment
b. 25 capital loss
If a security is sold for less than the original purchase price, the difference is called a capital loss. This would apply to both equity and debt securities.
A call option reaches its expiration date and goes unexercised. This means
I.the buyer gains the premium paid
II.the buyer loses the premium paid
III.the writer gains the premium received
IV.the writer loses the premium received
a. I and IV
b. II and IV
c. I and III
d. II and III
d. II and III
Buyers of options pay the premiums for the contracts, and writers (sellers) receive the premiums. If the contract goes unexercised, the buyer loses the premium paid while the seller gets to keep it—a gain.
At expiration, for those who trade put options, which of the following is TRUE?
a. put buyer wants the contract to be in the money
b. put buyers want the contract to be out of the money
c. put writers want the contract to be trading with intrinsic value
d. put writers want the contract to be in the money
a. put buyers want the contract to be in the money
At expiration, put buyers (like call buyers) want the contracts to have intrinsic value and, therefore, to be in the money. Put writers (like call writers) want the contracts to be either at or out of the money and, therefore, have no intrinsic value.
The Securities Act of 1933 exempts all of the following securities from registration EXCEPT
a. US government issues
b. real estate investment trust
c. municipal securities
d. savings and load issues
b. real estate investment trust
Though some REITs trade on exchanges and others may not, all REITs are nonexempt securities that must be registered with the SEC.
An associated person is unable to work for any business other than his member firm without having the employing broker-dealer’s
a. assuming liability for that business
b. knowledge of activity
c. authorization by a principal
d. permission in writing
b. knowledge of activity
An associated person cannot work for any business (independent activity) other than his member firm without his employing broker-dealer’s knowledge
Interest on a 7% corporate bond would be paid to the investor as
a. several checks totaling 70 each year
b. 2 semiannual checks for 35 each
c. 1 annual for 70
d. 2 semiannual for 70
b. 2 semiannual checks for 35 each
Interest on corporate bonds is paid twice per year, or semiannually. The interest rate reported, however, is an annual rate. Thus a 7% bond would pay 7% of par ($1,000), or $70, per year as 2 semiannual checks for $35 each.
An investor who has a short position in 500 shares of JKH common stock would eliminate that position by
a. enter an opening purchase order for 500 shares of jkh
b. entering closing purchase order for 500 share of abc
c. entering closing sale order for 500 shares of jjk
d. entering a closing purchase order for 500 shares of jkh
d. entering a closing positon for 500 shares of jkh
In order to eliminate a position, long or short, the investor always takes an action opposite that of the one that began (opened) the position. Therefore, we always close the position with a closing order. In the case of a short position, we began with a sale, so we close with a purchase of the same security that was initially sold short—in this case, 500 shares of JKH.
A bank is likely to do which of the following when the Federal Reserve Board (FRB) tightens the money supply?
a. lower broker call loan rate
b. raise hypothecation loan rate
c. lower its prime rate
d. raise its prime rate
d. raise its prime rate
The prime rate and the broker call loan rate are set by banks for loans to corporate customers and broker-dealers, respectively. If the FRB tightens the money supply (makes less money available to lend), banks will need to charge more for loans and will raise their lending rates. The hypothecation process isn’t a rate, but a percentage amount (140% of the debit balance) and will not be impacted by the Fed’s action with the money supply.
Mutual funds that market directly to the public, using no underwriter and charging no sales charge, are called
a. no load funds
b. loaded funds
c. charge free funds
d. free sale funds
a. no load funds
Some funds distribute their own shares without using an underwriter and, hence, have no need to levy a sales charge. Because sales charges are also called sales loads, such funds are known as no-load funds.
Being secured by no physical asset and backed only by a bank’s good faith and credit, a bank’s promise to pay principal and interest can be evidenced in which of the following securities that are traded in the secondary market?
a. commercial paper
b. certificate of deposit
c. notes and bonds
d. negotiable certificates of deposit
d. negotiable certificates of deposit
A negotiable certificate of deposit is an unsecured money market instrument issued by banks. Negotiable means that it can be traded in the secondary market and unsecured means that it is backed only by a promise to pay—a bank’s good faith and credit.
A customer purchased 1 MNO Jan 50 call at 2. What is the breakeven point for both the purchaser and the seller?
a. 52
b. 50
c. 50 and 48
d. 52 and 48
a. 52
Whether long or short the call, the breakeven for a call is found by adding the premium to the strike price. For the call buyer, the contract is profitable above the breakeven. For a call seller, the contract stands to lose money if the price of MNO rises above breakeven.
Accusations of FINRA Conduct Rule violations will heard and handled under the
a. code of procedure
b. uniform securities act
c. uniform practice code
d. code of arbitration procedure
a. code of procedure
The Code of Procedure (COP) describes how member violations of the Conduct Rules will be heard and handled.
Regarding the taxation of gains on securities, all of the following are true EXCEPT
a. short term gains are taxed at less than favorable income tax rates
b. long term gains are taxed at more favorable long term rates
c. gains on securities for a position held at least 12 months are not taxable
d. capital gains are associated with the sale of securities and other real assets
c. gains on other securities for positions held at least 12 months are not taxable
Investment income, which includes capital gains realized on securities positons, is taxable. Depending on how long a security was held, the gains might be taxable at the investor’s ordinary income tax rate (for short-term gains) or at a more favorable long-term rate if the position was held for longer than 12 months.
Rule 144 imposes volume limitations on the number of shares that can be sold by
I.control persons selling registered stock held for 1 year
II.control persons selling restricted stock held for 2 years
III.nonaffiliates selling registered stock held for 1 month
IV.nonaffiliates selling restricted stock held for more than 6 months
a. III and IV
b. I and II
C. I and IV
d. II and III
b. I and II
Control persons are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) when selling registered stock. If, however, the shares are restricted, volume limits for nonaffiliates are imposed for 6 months.
A March 30 call purchased at 3 has expired without being exercised. The owner of the call
a. losses the 30 paid
b. loses 300 premium paid
c. keeps the 30 paid
d. keeps the 300 paid
b. loses the 300 premium paid
The owner (buyer) of the call would have paid 3 ($300) for the contract. If the contract expires unexercised, the owner loses the $300 premium paid.
Regarding CDs and negotiable CDs issued by banks,
a. only CDS are consider money market instruments
b. both CD and negotiable CD are considered money market instruments
c. neither are money market instruments
d. only negotiable CDs are considered money market instruments
d. only negotiable CDs are considered money market instruments
Banks issue and guarantee certificates of deposit (CDs) with fixed interest rates. Some that can be traded in the secondary market are known as negotiable CDs. Only these negotiable CDs are considered money market instruments.
Which of the following refers to prolonged periods of slow or little economic growth, unusually accompanied by high unemployment?
a. deflation
b. stagnation
c. trough
d. stagflation
b. stagnation
Economic “stagnation” refers to prolonged periods of slow or little economic growth, unusually accompanied by high unemployment.
While a branch office manager can initially approve an options account for trading, it must ultimately be approved by
a. OCC
b. RR opening the account
c. firms ROP
d. forms trading department
c. the firms ROP
Initially, a branch office manager (BOM) can approve an options account. However, all options accounts must ultimately be approved by the firms registered options principal (ROP), and done so promptly.
The owner of a listed put equity option has the right to
a. buy another put at discount
b. sell the stock at the strike price
c. sell another put at a premium
d. buy the stock at the strike price
b. sell the stock at the strike price
The owner of a put (long) purchased the right to sell (to put) the stock at the strike price to those who are short the option. The exercise of their put is an instruction to assign the writer of the put, meaning the writer (short) must fulfill their obligation to buy the stock at the strike price.
Each of the following activities would be deemed by market regulators to be manipulative behavior EXCEPT
a. capping
b. front running
c. marking the open or close
d. proxy solicitation
d. proxy solicitation
Proxies are permissible to be solicited. The SEC requires a company to give stockholders information about the items to be voted on and allow the SEC to review this information before it sends the proxies to shareholders.
An investment that allows for a share in the income, gains, losses, deductions, and tax credits of the business entity to pass through to investors is known as
a. a real estate investment trust
b. a general partnership
c. a limited partnership
d. an option
c. a limited partnership
Limited partnerships (LPs) pass through to investors (partners) a share in the income, gains, losses, deductions, and tax credits of the business entity.
Holding customer mail is consistent with your broker-dealer’s in-house rules. Considering this, if requested to do so, the BD must
a. have customer request a new after six months
b. request approval from SEC
c. await approval from FINRA
d. verify at reasonable intervals that customer instructions still apply
d. very at reasonable intervals that customer instruction still apply
If the BD chooses to hold customer mail, once requested to do so in writing the BD must verify at reasonable intervals that the customer’s instructions still apply. The rule regarding holding customer mail does not require the BD to request or get SEC or FINRA approval and there is no requirement that the customer make additional requests to continue having the BD hold mail.
With CCD stock at 40, a September 45 call trading at 3 is out of the money by
a. 5 points, negative intrinsic value
b. 2 points, no intrinsic value
c. 2 points, negative intrinsic value
d. 5 points, no intrinsic value
d. 5 points no intrinsic value
When a calls strike price is higher than the underlying stocks value, the call contract is out of the money. In this case, it is out of the money by 5 points (45 – 40). When a contract is out of the money, we say that it has no intrinsic value. We do not use the term “negative” when referring to contracts with no intrinsic value.
The coupon for a bond is calculated as a percentage of
a. current market value for a bond
b. par value, 10
c. par value, 100
d. par value, 1000
d. par value, 1000
The coupon rate on a bond is calculated as a percentage of par value. While par value can be any amount the issuer determines it to be, it is usually $1,000 for bonds and should be assumed to be so, unless it is indicated otherwise.
Which of the following would be considered earned income?
a. premium kept from unexercised short put
b. interest received from bond investment
c. dividends received from stock investment
d. bonus received from employment
d. bonus received from employment
Earned income is received as the result of participating in trade or business, the generation and/or sale of goods and/or services—in other words, from “work.” The other choices are earnings from investments and are known as portfolio income.
Intraday price changes due to normal market forces would be found with I.closed-end fund shares II.exchange-traded fund shares III.hedge fund shares IV.open-end (mutual) fund shares
a. I and IV
b. I and II
c. III and IV
d. II and III
b. I and II
Both closed-end funds and ETFs trade in the open market and are priced by supply and demand. Open-end (mutual) funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday.
Which of the following would be TRUE with regard to capital gains?
I.If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer’s ordinary income.
II.If the asset is held for more than a year, the gain is considered to be a long-term and is taxed at a favorable long-term rate.
III.Capital gains are usually associated with the distribution of dividends including stock splits.
IV.Capital gains can be defined as the income earned from interest, wages, rents, royalties, and similar income streams.
a. I and III
b. I and II
c. II and III
d. III and IV
b. I and II
Capital gains are associated with the sale or exchange of property including securities. The category of capital gain taxation is broken down into long and short-term capital gains. If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer’s ordinary income. Therefore, for short term capital gains, the tax rates are the same as the taxpayer’s ordinary income. However, if the asset is held for more than one year, the gain is considered to be a long-term and is taxed at a favorable rate.
Regarding options, it should be recognized that the maximum movement for any underlying stocks price could be
a. its breakeven
b. as low as zero or as high as infinity
c. as low as zero or as high as its breakeven
d. as low as its breakeven or as high as its maximum gain point
b. as low as zero or as high as infinity
Any stock’s price could move as low as zero or as high as infinity. That movement toward either of those points, and the market attitude of the option position employed (bullish or bearish), determines what the maximum gain, loss, or breakeven point is.
With CDT stock at 42, a September 40 call trading at 3 is
a. at the money
b. out of the money by 2 points
c. in the money by 2 points
d. in the money by 3 points
c. in the money by 2 points
When a calls strike price is lower than the underlying stocks value, the call contract is in the money. The amount it is in the money is the difference between the 2—2 points (42 – 40).
Corporate accounts may trade on margin
a. never
b. only if specifically listed as being permitted
c. always
d. only if not listed as being restricted from doing so in the corporate charter
d. only if it’s listed as being restricted from doing so in the corporate charter
As long as there are no restrictions against trading on margin in the corporate charter, corporate accounts may trade on margin.
An investor holds a Treasury note with a stated interest of 6%. The investor will receive
a. 2 $60 interest payments per year
b. 2 $30 interest payments per year
c. 1 $60
d. one $6
b. two $30 interest payments per year
Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in 2 payments of $30 each.
Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is TRUE?
a. sales load increase investor returns
b. only management fees and operating expense reduce investor returns
c. all increase investor returns
d. all reduce investor returns
d. all reduce investor returns because they reduce amount of money available for fund to invest
Sales loads go to the underwriters or broker-dealers selling the shares for the fund. Therefore, they are subtracted from the dollars invested and in that light reduce possible returns for investors. Management fees and operating expenses are ongoing costs to the fund and, therefore, reduce the dollars that can be invested, again reducing potential returns.
A put feature attached to a bond allows
a. bondholder to holder bond beyond maturity
b. an issuer to put additional bonds to existing bondholders
c. a bondholder to put a bond back to issuer, benefit issuer
d. a bondholder to put a bond back to issuer for redemption
d. a bondholder to a put a bond back to the issuer for redemption at times that will benefit the bondholder
A put feature attached to a bond allows a bondholder to put a bond back to the issuer for redemption before maturity. Bondholders will do this when interest rates have risen. For example, if a bondholder has a bond paying 4% and interest rates have risen to 6%, why settle for a 4% return when prevailing market rates are now up to 4%? Better to put the 4% bond back to the issuer for redemption and then purchase a new bond paying the prevailing higher rate. Obviously, the ability to put the bond back to the issuer benefits the bondholder.
All of the following are nonsystematic risks EXCEPT
a. call risk
b. capital risk
c. business risk
d. purchasing power risk
d. purchasing power risk
Purchasing power or inflation risk is a systematic risk. Capital risk, business risk, and call risk, among others, are nonsystematic risks, those that portfolio diversification can help to reduce.
A market maker provides a firm quote to another broker/dealer then refuses to buy or sell at the price quoted. This is a violation where the market maker is said to be
a. pegging
b. freeriding
c. backing away
d. marking the open
c. backing away
A market maker that does not honor its firm quote is said to be “backing away”.
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. out of the money
b. without any intrinsic value
c. at the money
d. at parity
d. 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.
Which of the following are associated with manipulative, deceptive, or fraudulent devices? I.Breakpoint sale
II.Preemptive
III.Fill-or-kill
IV.Capping
a. II and III
b. I and IV
c. I and II
d. III and IV
b. I and IV
“Breakpoint sales” is an expression that means those sales that are just below the breakpoint. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges. Capping is entering sell orders in a stock for the purpose of keeping the stock from rising above a certain price. Usually when this violation is detected it is in conjunction with someone who is short calls to keep the stock from rising above the strike price of calls in an effort to keep the contracts out-of-the-money and thus not likely to be exercised. Both of these violations are inconsistent with just and equitable principles of trade.
Which of the following is an example of an equity security?
a. municipal bonds
b. debentures
c. mortgage bonds
d. preferred stock
d. preferred stock
Common and preferred stock are examples of an equity security. Bonds of any type by comparison are certificates of indebtedness—debt instruments
A statutory debt limitation imposed on a municipality restricts its authority regarding
a. insuring municipal bond issues
b. selling municipal revenue bonds
c. issuing general obligation GO bonds
d. raising tax rates
c. issuing general obligation GO bonds
A municipality may be limited by statute regarding the amount of GO debt it may incur, thus limiting the GO bonds it can issue.
A hedge fund is permitted to do which of the following that a mutual fund is NOT permitted to do?
a. invest in commodities and currencies
b. include both stock and bonds in its portfolio
c. invest in equity and debt securities
d. have pooled and professionally managed portfolios
a. invest in commodities and currencies
All the answer selections are applicable to both hedge funds and mutual funds except investing in commodities and currencies. Mutual funds are limited to investing in securities only. While commodities and currencies can be investments, they are not securities.
Water and sewer facilities are most likely to use what kind of debt financing to fund expansion plans?
a. US Treasury Bills
b. municipal revenue bonds
c. municipal general obligations bonds
d. US treasury receipt s
b. municipal revenue bonds
Municipal revenue bonds are issued to finance any municipal facility that charges user fees. These municipal bonds are self-supporting because principal and interest payments are made exclusively from revenues generated by the project for which the debt was issued, such as a water and sewer facility billing the municipalities’ customers for usage each month.
Listed options expire on
a. 3rd Friday of expiration month
b. 1st day of expiration month
c. business day after settlement
d. 1st Friday after expiration month
a. 3rd Friday of expiration month
Listed options contracts expire on the 3rd Friday of the expiration month at 11:59 pm.
Options contracts
a. give one party right to buy or sell underlying security
b. obligate both parties to sell
c. give both parties right to buy or sell
d. obligate both parties to purchase
a. give one party the right to buy or sell underlying security
Options contracts involve 2 parties: buyer and seller. One party (buyer) has the right to either buy or sell the underlying security, while the other party (seller) would have the obligation to fulfill the contra side of the buy or sell transaction.
Which of the following securities is the underlying asset used to create an ADR?
a. bonds
b. common shares
c. warrants
d. preferred shares
b. common shares
ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares of a foreign issuer 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. Each ADR may represent one or more shares of foreign-company stock held on deposit.
All of the following people working for a registered broker-dealer would be required to be fingerprinted EXCEPT
a. CCO
b. clerk handling mail
c. driver of high net worth clients
d. director of training
c. driver of high net worth individuals
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 BD, a driver is not.
An investor is short a January 30 call at 5. Maximum loss for the investor is
a. 50 points, 5,000
b. unlimited
c. 5 points or 500
d. 25 points or 2,500
b. unlimited
Maximum loss for a short call is unlimited. This could occur because the underlying stock can rise to some unlimited number.
Which of the following would constitute improper use of a customer’s securities or funds?
I.Agreeing to a stock purchase the representative thinks is beyond the client’s means
II.Selling a bond at the client’s insistence during a period of high interest rates
III.Lending securities for a short sale when the client has agreed to it on the phone
IV.Borrowing a client’s funds without permission, though it will be repaid the same day
a. II and IV
b. I and II
c. I and III
d. III and IV
d. III and IV
Though a customer may be ill-advised, complying with it does not constitute improper use. To lend securities without a signed loan consent agreement does constitute improper use, as does borrowing the client’s funds without permission of the client, no matter how briefly the funds will be held.
Which of the following preferred issues is most likely to fluctuate in line with the issuer’s common shares?
a. participating
b. convertible
c. adjustable rate
d. callable
b. convertible
Convertible preferred shares can be converted into shares of the issuer’s common stock. In this light, the value of a convertible preferred stock is linked to the value of the common stock and the convertible preferred share price tends to fluctuate in line with the common
Which of the following are TRUE of municipal revenue bonds?
I.They are secured by a specific pledge of property.
II.They are a type of general obligation bond.
III.They are not subject to statutory debt limits.
IV.They are backed by a facilities ability to generate revenue.
a. II and III
b. I and II
c. III and IV
d. I and IV
c. III and IV
The 2 types of municipal bonds are GOs and revenue bonds. Revenue bonds are not secured by a specific pledge of property; instead they are backed by project revenue. Unlike GO bonds, they are not subject to any statutory debt limits.
A corporation wanting to raise cash to finance accounts receivable and seasonal inventory needs is likely to issue any of the following EXCEPT
a. promissory notes
b. prime paper
c. commercial paper
d. bonds
d. bonds
To raise cash for short-term needs, such as accommodating accounts receivable or inventory needs, corporations would issue commercial paper (also known as prime paper or promissory notes). Bonds should always be associated with long-term debt financing.
Purchased 15 years ago with a coupon of 6.25%, a corporate bond in an investor’s portfolio has matured. With interest rates now substantially lower at 2.75%, this investor, having no immediate need for the proceeds, is now exposed to
a. financial risk
b. call risk
c. reinvestment risk
d. interest rate risk
c. reinvestment risk
The inability to invest proceeds from an investment that had been earning a higher rate of return, at the now current lower rate, is known as reinvestment risk.
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
a. market risk , lead to interest rate risk
b. call risk, lead to reinvestment risk
c. business risk, lead to financial risk
d. interest rate risk, lead to financial risk
b. call risk, lead to reinvestment risk
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.
Registered representatives must complete or satisfy each of the following EXCEPT
a. form U-5
b. regulatory element
c. firm element
d. state registration requirements
a. form U-5
FINRA requires that registered representatives complete both the regulatory and the firm elements of a continuing education program. In addition to satisfying FINRA requirements for registration, each state has its own requirements that must be satisfied before a representative can act in that state. A representative is not required to file a Form U-5. That form is filed by the member firm upon the termination of a registered representative for any reason. A copy will be provided to the departed representative.
Regarding purchases on margin, which of the following is TRUE?
a. neither rights nor warrants can be purchased on margin
b. rights can, warrants cannot
c. both can
d. warrants can, rights cannot
d. warrants can be purchased on margin, but rights cannot
Warrants are marginable securities, but rights are not.
Investors in hedge funds should know that the funds are
a. unregulated, no requirements
b. unregulated, abide by laws for accredited investors
c. highly regulated, abide by all laws
d. highly regulation, no laws
b. unregulated but must abide by laws that investors be accredited
Although hedge funds are unregulated (no SEC registration is required), there are laws requiring that those who purchase shares of hedge funds be accredited investors. That is, they must meet minimum annual income and net worth criteria, as well as have considerable investment knowledge
A customer is interested in an exchange-traded fund (ETF). With regard to how they can be traded, you would want the customer to be aware that
a. real time quotes are available, purchased throughout the day
b. NAV calculated at end of day, plus sales charge
c. calculating NAV at EOD and adding how use forward pricing
d. real time quotes are available, use forward pricing
a. real time quotes are available which can be purchased throughout the day
ETFs can be traded (purchased and sold) throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have an NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions (not sales charges).
A municipal finance professional (MFP) is
a. elected
b. employee of MSRB
c. employed by municipality, not elected
d. employee of FINRA member engaged
d. employee of FINRA member engaged in municipal security representative activities such as underwriting and trading
As per the Municipal Securities Rulemaking Board (MSRB), a municipal finance professional (MFP) is an associated person of a member firm who is primarily engaged in municipal securities representative activities, including underwriting, sales and trading, or any other activity that involves communications with the public regarding municipals.
Which of the following are considered money market securities at the time of issue?
a. T bonds
b. T bills
c. T notes
d. municipal bonds
b. t bills
Money market securities are short-term (1 year or less) securities at the time of issue. Of the choices listed, only Treasury bills meet the short-term criteria at the time of issue.
A “free lunch” seminar is advertised among senior citizens who may be looking to improve the results of their investment portfolio. Which of the following activities by the registered hosts of the seminar would be deemed a potential violation?
I.Use of a designation such as Chartered Senior Advisor, a largely unknown designation
II.The representative is introduced as someone approved by FINRA to answer questions from senior investors
III.Use of degrees and registration licenses
IV.Promoting technology stocks
a. I and IV
b. III and IV
c. II and III
d. I and II
d. I and II
Use of degrees or designations may never be used in a misleading fashion nor can any reference to nonexistent or largely unknown designations be made. The use of designations is permissible so long as the compliance department of the firm has performed due diligence and is satisfied the credentials are bona fide and would be reasonably recognized as true tokens of expertise. Using educational degrees or securities registration licenses is permissible. To say that the representative is approved by FINRA to offer advice to seniors would likely bring heavy sanctions. The promotion of any stock is permissible so long as it is a balanced presentation with disclosure of the potential risks.
Which of the following are considered systematic risks—those that would impact all businesses? I.Market risk II.Inflation risk III.Regulatory risk IV.Business risk
a. III and IV
b. II and III
c. I and II
d. I and IV
c. I and II
Systematic risk is the risk that changes in the overall economy will impact securities regardless of the company’s business. Examples of that are inflation (purchasing power) risk, interest-rate risk, and market risk. Business risk and regulatory risk are examples of nonsystematic risk, the kind of risk that might be unique to certain businesses or industries.
Which of the following is TRUE for U.S. Treasury-issued securities?
a. Tbills purchased at discount, T bonds purchased at percentage of par
b. TBills and T bonds pay semiannually
c. t notes are purchased at discount, to bonds purchased at percentage of par
d. t notes and t bills pay interest annually
a. T bills are purchased at discount, T Bonds purchased at percentage of par
T-bills are purchased at a discount, while T- bonds and T-note are purchased as a percentage of par. T-notes and T-bonds pay interest semiannually, but interest on T-bills is not paid until maturity (the difference between the discount paid and par value received).
If a stock is at risk of failing to maintain the minimum price requirements to remain listed on the NYSE, the most likely corporate action taken to preserve the listing could be
a. reducing staff
b. reverse split
c. stock dividend
d. increasing earnings
b. reverse split
Reverse splits are a way of increasing a company’s share price. In a reverse split, the number of shares outstanding decreases, but the price per share increases. As with all adjustments, a shareholder’s total position in the stock remains unchanged before and after the action.
In safety of principal, municipal bonds are considered second only to
a. AAA corporate debt issues
b. US government and agency bonds
c. corporate P/S
d. Corporate C/s
b. US government and agency bonds
Municipal securities are considered second in safety of principal only to U.S. government and agency issues.
Each of the following are likely to be found on a trade confirmation EXCEPT
a. bond credit rating
b. commission
c. CUSIP
d. description
a. bond credit rating
Trade confirmations are required to include many details about the trade and the securities including, but not limited to, the trade date, description of the security, CUSIP number, commissions (not markups or markdowns) and more. There is no obligation for the firm to print the bond credit rating on the trade confirmation.
Identify 2 trading strategies that a hedge fund could employ in its portfolio but a mutual fund cannot. I.Limiting investments to a narrow group of securities within one industry
II.Trading on margin to purchase portfolio securities
III.Purchasing speculative or low rated securities
IV.Selling short stocks
a. II and III
b. I and III
c. I and IV
d. II and IV
d. II and IV
While there can be limited and rare exceptions, mutual funds are prohibited from purchasing securities on margin and selling securities short. Both strategies, however, are commonly employed by hedge funds.
FINRA has a continuing education requirement with the goal of making sure that all registered personnel are aware of industry changes. If a registered representative has just observed her second anniversary in the industry and did the required regulatory element CE, the next time she will be required to sit for the regulatory element is
a. three years from now
b. next year
c. within 120 days
d. two years from now
a. three years from now
New registered representatives are required to sit for the regulatory element as of their second anniversary. Thereafter, they are scheduled each three years. Having just completed her second anniversary regulatory element CE, she will be next scheduled in three years.
The general partner of a limited partnership has responsibility for all the following EXCEPT
a. organizing the business
b. paying partnership debts
c. providing all partnership capital
d. managing day to day operations
c. providing all partnership capital
The general partner organizes and manages the partnership and assumes unlimited liability, responsible for paying all partnership debts. While some capital may also be provided by the GPs, it is the limited partners who provide the bulk of the capital.
Efforts to push up the price of stock one owns by soliciting buy orders from customers so that the stock owned can be sold later at a higher price is a violation commonly known as
a. pump and dump
b. marking the open
c. marking the close
d. churning
a. pump and dump
One form of securities fraud where an effort is made to push up the price of a stock that is currently owned by soliciting buy orders so that the stock can be sold later at a higher price is known as a pump and dump scheme.
Debt instruments put up for auction by the U.S. Treasury Department that offer intermediate maturities best describes
a. T Bonds
b. T Bills
C. T Notes
d. anticipation notes
c. treasury notes
Treasury notes (T-notes) are the intermediate maturity (2–10 years) government-issued debt instruments. T-bills are short term (less than one year), and T-bonds are long term (10 years or more). Anticipation notes are short-term municipal-issued revenue notes.
Which of the following correctly states the impact of open-market operations taken by the Federal Reserve Board (FRB)?
a. By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.
b. By selling securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates
c. By selling securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.
d. By buying securities, the FRB takes money out of the banking system, expanding the money supply and increasing interest rates.
a. By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates.
When the FRB buys securities via open-market operations, it is taking securities out of the banking system and putting money into the banking system. This expands the money supply and reduces interest rates. Conversely, when the FRB sells securities via open-market operations, it is putting securities into the banking system and taking money out of the banking system. This contracts the money supply and increases interest rates.
An investor sells (writes) put options on MAS stock. This investor is
a. neither bullish nor bearish
b. both bullish and bearish
c. bullish
d. bearish
c. bullish on MAS the stock
Those who sell put options may be obligated to buy the stock at the strike price if the contract is exercised by the owner. Being in a position to own the stock makes the investor bullish on the stock.
On October 8, an investor discovers that a security purchase that took place on August 5 of the same year was prompted by fraudulent information provided by the broker-dealer on the day of the purchase. How long does the investor have to bring action?
a. October 7, following year
b. august 4, following year
c. October 7, third year
d. august 4, third year
a. until October 7 of the following year
The statute of limitations on fraudulent practices, under the Securities Exchange Act of 1934, is 3 years from the event itself, or one year from its discovery, whichever comes sooner.
An investor notices that a bond originally bought at 95 some years ago is now trading at a price of 88. The investor sells the bond, then buys it back the next day for 88.5 with the intention of declaring a loss from the original purchase and sale on this year’s tax return. This would be known as
a. a wash sale, taking loss is prohibited
b. supporting, taking a loss is allowed
c. pegging, taking loss is allowed
d. matched order, taking loss is prohibited
a. a wash sale, taking the loss is prohibited
Quickly repurchasing a security that was just sold for a loss is recognized as having the intention to take advantage of the loss for tax purposes but not lose the income or potential for future gains from the security. This is known as a wash sale and taking the loss is prohibited. For the loss to be allowed, the investor must wait at least 30 days before repurchase. Matched orders, pegging, and supporting are all prohibited activities meant to manipulate stock prices.
For margin transactions taking place through introducing broker-dealers, those who do not clear their own transactions, extension requests are
a. never permitted
b. made by introducing broker dealer
c. made by clearing firm
d. made by customer
c. made by clearing firm
Broker-dealers who are self-clearing will make their own extension requests. For those that are not self-clearing, known as introducing broker-dealers, the extension request must be made by the clearing firm.
MAS Corporation has enjoyed an extremely profitable year. It has been determined that those owning the MAS 4% preferred, participating to 6% preferred shares, will receive the full participating dividend. The participating shareholders will receive an additional dividend of
a. 4%
b. 6%
c. 10%
d. 2%
d. 2%
The stated MAS preferred dividend is 4%, participating up to 6%. In this year, when it has been determined that they should receive the full participating dividend, they will receive the additional participating 2%.
For a callable bond priced at a discount,
a. YTC will be lower than CY
b. YTM will equal YTC
c. YTM will be lower than YTC
d. YTC will be lower than coupon
c. YTM will be lower than YTC
For callable bonds trading at a discount, YTC will be the highest possible yield, higher than YTM, CY, and the coupon (stated or nominal) yield.
A call feature attached to a bond allows
a. bondholder to hold beyond maturity
b. bondholder to call the issuer for redemption
c. issuer to call bond before maturity, benefit issuer
d. issuer to call before maturity, benefit bondholder
c. issuer to call in a bond before maturity at times that will benefit the issuer
A call feature attached to a bond allows an issuer to call in a bond before maturity. Issuers will do this when interest rates have fallen. For example, if an issuer has an outstanding bond paying 6% and interest rates have fallen to 4%, why pay out 6% when prevailing market rates are only 4%? Better to call in the 6% bond and reissue a new bond at the current rate of 4%. Obviously, the ability to call in the bond benefits the issuer.
All of the following are stages of money laundering EXCEPT
a. placement
b. diversification
c. layering
d. integration
b. diversification
Money laundering consists of moving illegally obtained funds into the financial system (placement), concealing its origins by the use of multiple transactions (layering), and then commingling it with legitimate funds in legitimate enterprises (integration). Diversification is an investment principle.
Straight preferred shares
I.are noncumulative
II.are cumulative
III.allow for missed dividends to be paid later
IV.have no provision for paying missed dividends later
a. I and IV
b. II and III
c. I and III
d. II and IV
a. I and IV
Straight preferred shares have no special features beyond the stated dividend payment. Any missed dividends are not paid to the holder, thus they are noncumulative; missed dividend payments do not accumulate.
For securities held in “street name,” which of the following is TRUE?
a. broker dealer is beneficial owner
b. customer is named or nominal owner
c. customer is beneficial owner
d. bank accepting securities as collateral is beneficial owner
c. customer is beneficial owner
When securities are held in street name (the name of the broker-dealer), the BD is the named or nominal owner, but the customer is still the beneficial owner retaining all rights of ownership.
Your customer has one position in her account and it poses an unlimited loss potential. Which of the following is it?
a. long call
b. short call
c. long put
d. short put
b. short call
Short calls are bearish. Wanting the stock to go down the risk that the stock price will rise and, in theory, can go to infinity. Therefore, short calls carry unlimited risk. Of the 4 basic options positions, it is the only one with an unlimited loss potential.
Which of the following would have no effect on the NAV per share of a mutual fund share?
a. portfolio securities had to be sold for a big capital loss
b. fund receives dividend from portfolio stock
c. fund pay monthly operating expense
d. portfolio market value undergoes large increase
a. portfolio securities had to be sold for big capital loss
Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.
Typically, a corporation would NOT issue
a. option contracts
b. debentures
c. preferred stock
d. common stock
a. option contracts
Corporations issue equity securities (stock) and debt securities (bonds and debentures), but they do not issue options. Options are issued by the Options Clearing Corporation (OCC).
An investor owning 500 shares of stock worth $40 per share receives notice that the stock will undergo a split. When the split is completed, the investor owns 400 shares of stock worth $50 per share. The split must have been I.a forward split II.a reverse split III.an uneven split IV.an even split
a. I and IV
b. I and III
c. II and IV
d. II and III
d. II and III
This split reduced the number of shares, which makes it a reverse split. This investor now owns 400 shares when previously they had 500 shares, which would be expressed as a 4:5 split. Since neither number in the ratio is 1, it is an uneven split.
Obtaining the financial status of the customer, and whether or not they meet income and net worth criteria, could be required for all of the following EXCEPT
a. real estate limited partnership
b. real estate investment trust
c. equipment leading limited partnership
d. oil and gas limited partnership
b. real estate investment trust
Real estate investment trusts (REITs) do not require proof of financial status for investment. Limited partnerships and other DPPs can, particularly those that are offered privately (as private placements) as opposed to those that are offered publicly (by public offering).
A broker-dealer firm opening a corporate account must establish all of the following EXCEPT
a. names of those who will have access to or authority over account
b. any limitations placed on account activities
c. legal right of corporation to open brokerage account
d. location of any account record corporation will keep when received
d. location of any account records the corporation will keep when received
Where the corporation keeps its records is of no concern to the broker-dealer. The broker-dealer will keep its own records on the account, in any event. All the other information noted must be ascertained before the account may be opened.
An August 15 call is written at 4. The call expires without being exercised by the owner. The writer of the call
a. loses the 150 paid when call was written
b. loses 400 paid when call was written
c. keeps the 400 received when call was written
d. keeps 150 received when call was written
c. keeps the $400 received when call was written
The writer (seller) of the call would have received 4 ($400) for the contract when it was written. If the contract expires unexercised, the writer keeps the $400 premium received.
Securities and Exchange Commission Rule 144 regulates
a. sale of new issue securities in primary market
b. state level registration securities
c. communication with public retail investors
d. the sale of control and restricted securities
d. sale of control and restricted securities
Securities and Exchange Commission Rule 144 regulates the sale of control and restricted securities in the secondary market. The rule stipulates the holding period, quantity limitations, manner of sale, and filing procedures when divesting of control or restricted shares.
One of the FINRA Conduct Rules is concerned with private securities transactions. Under that rule, it would be CORRECT to state that
I.if the member approves the RR participating in a transaction for compensation, it must treat the transaction as if it is being done on its own behalf by entering the transaction on its own books and supervising the associated person during the transaction
II.as long as no compensation to the RR is involved, notification to the member is not required
III.sale of a securities product to the RR’s mother where there is only nominal compensation is not covered under the rule
IV.if the member disapproves of the RR’s participation in a transaction for compensation, the associated person may not participate in it
a. I and II
b. III and IV
c. II and III
d. I and IV
d. I and IV
FINRA divides private securities transactions into two categories. If the associated person will receive compensation, the rules are more comprehensive requiring approval or disapproval. If approved, the firm must record the transaction on its books and records and supervise as if it were executed on behalf of the member firm. Trades with immediate family members are not included if there is no compensation. In other transactions where there is no compensation, written notice to the employer member is still required.
An officer of a financial firm has identified what might represent suspicious behavior on the part of a customer, involving more than $5,000. When must the firm file a suspicious activity report (SAR)?
a. within 180 calendar days
b. within 5 business days
c. by the end of business day
d. within 30 calendar days
d. within 30 calendar days
A suspicious activity report must be filed with FinCEN within 30 calendar days of the firm becoming aware of the suspicious activity. The suspected parties may not be informed that they are the subject of an SAR.
A company offers to repurchase outstanding debt securities it has issued directly from its bondholders for cash in what would commonly be known as a
a. buy back
b. tender offer
c. hostile takeover
d. acquisition
b. tender offer
When a company offers to buy outstanding securities for cash or for cash plus other securities from its stockholders or bondholders this is known as a tender-offer. In contrast, a buyback, sometimes referred to as a repurchase, is when a company buys its own outstanding securities in the open market rather than appealing directly to its investors.
An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy
a. callable
b. either call or non
c. noncallable
d. neither
c. noncallable bonds
If rates fall, bonds are likely to be called. Therefore, an investor who anticipates that rights might fall soon would look to purchase bonds that are not callable (noncallable). In this way, the investor is assured of receiving the coupon interest payments until maturity.
A broker-dealer that executes trades and settles transactions for another broker-dealer is called a
a. limited broker dealer
b. introducing firm
c. fully disclosed firm
d. carrying firm
d. carrying firm
Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing, or fully disclosed firms.
With CCD stock at 40, a September 45 call trading at 3 is out of the money by
a. 5 points and has no intrinsic value
b. 2 points and has no intrinsic value
c. 5 points, negative intrinsic
d. 2 points, negative intrinsic value
a. 5 points and has no intrinsic value
When a calls strike price is higher than the underlying stocks value, the call contract is out of the money. In this case, it is out of the money by 5 points (45 – 40). When a contract is out of the money, we say that it has no intrinsic value. We do not use the term “negative” when referring to contracts with no intrinsic value.
If the dollar price of a municipal bond is 101 and the basis is 6.10, the nominal yield is
a. greater than 6.1
b. equal to YTM
c. less than 6.1
d. 6.1
a. greater than 6.1
For bonds trading at a premium (101), the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are yield to call, yield to maturity, current yield, and nominal yield.
An investor holds a Treasury note with a stated interest of 6%. The investor will receive
a. 2 $30 interest payments
b. 1 60 interest payment
c. 1 $6
d. 2 $60
a. 2 $30 interest payments
Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in 2 payments of $30 each.
If the U.S. dollar is relatively strong against the Japanese yen, it can be assumed that
a. US dollar buy more goods in japan, japan yen buy fewer goods produced in US
b. US buy more produced in Japan, Japan yen buy more produced in US
c. US buy fewer produced in Japan, jap buys more produced in US
c. US buy Fewer, Jap buy fewer
a. The US dollar buy more goods produced in japan, the Japanese Yen buy fewer goods produced in US
The strength of one country’s currency against another impacts trade in between the two. The stronger currency (in this case the U.S. dollar) will buy more foreign goods, and the weaker currency (in this case the JY) will buy fewer goods produced in other countries.
Which of the following regarding monetary or fiscal policy is TRUE?
a. monetary policy refers to actions that congress takes to influence the money supply
b. fiscal policies are government decisions enacted by the FRB
c. fiscal policies are actions taken by the president and congress to regulate the amount of money consumers will be able to borrow
d. monetary policy is what the FRB engages in when it attempts to influence the money supply
d. monetary policy is what the FRB engages in when it attempts to influence the money supply
Monetary policy is what the FRB engages in when it attempts to influence the money supply.
Fiscal policy refers to governmental budget decisions enacted by the president and Congress to regulate federal spending and taxation, and those decisions impacting deficits and surpluses.
An unsecured promissory note issued by a bank that can be traded in the secondary market is known as
a. a negotiable CD
b. commercial paper
c. prime paper
d. mortgage bond
a. negotiable CD
Corporations issue unsecured promissory notes known as commercial or prime paper. When a bank issues an unsecured promissory note, it is known as a negotiable certificate of deposit (CD).
Match the following statement to the BEST expression: Government should allow market forces to determine prices of all goods and that the federal government should reduce government spending as well as taxes.
a. supply side economic theory
b. monetarist theory
c. Keynesian theory
d. socialism
a. supply side economic theory
Supply-side economics holds that governments should allow market forces to determine prices of all goods. Supply-side adherents judge that the federal government should decrease government spending and taxes. In this way, sellers of goods will price them at a rate that allows them to meet market demand and still sell them profitably.
Obtaining the financial status of the customer, and whether or not they meet income and net worth criteria, could be required for all of the following EXCEPT
a. real estate investment trust
b. real estate limited partnerships
c. equipment leasing partnerships
d. oil and gas limited partnerships
a. real estate investment trust
For Treasury receipts and STRIPS, which of the following is TRUE?
a. treasury receipts are backed, strips are not
b. treasury strips are backed in full by US government, receipts are not
c. neither are backed
d. both are backed
b. Treasury STRIPS are backed in full by US government, Treasury Receipts are not
Brokerage firms can create and issue a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds. Issued by financial institutions, they are not backed by the U.S. government. However, the Treasury Department has its own version of receipts known as Treasury STRIPS. Issued by the Treasury Department, they are direct debt obligations of the U.S. government.
The Federal Reserve Board (FRB) might impact the money supply by using all of the following EXCEPT
a. prime rate
b. buying or selling securities in open market
c. discount rate
d. reserve requirements for member banks
a. prime rate
The prime rate is set by money center banks, not the FRB. The remaining 3 answer choices are the tools available to the FRB to be used to impact the money supply.
Upon application for registration as a registered representative to ensure that any criminal past might be discovered by the employing firm, the Securities and Exchange Commission (SEC) requires
a. obtaining credit report
b. filing fingerprint with SEC
c. filing fingerprint with US attorney general
d. personal interview with FINRA
c. the filing of fingerprint card with US attorney general
A fingerprint card is required to be filed with the U.S. Attorney General to ensure that any criminal past that might result in statutory disqualification from association with a member firm is discovered.
The rate at which banks lend to broker-dealers for the purpose of lending money for margin loans is typically
a. slightly below other ST lending rates
b. notably below other ST lending rates
c. notably above other ST lending rates
d. slightly above other ST lending rates
d. slightly above other short term lending rates
The broker call loan rate is the rate at which banks lend to broker-dealers for the purpose of lending money for margin loans. This rate is usually slightly above, by a percentage point or so, other short-term lending rates.
Securities acquired through some means other than a registered public offering are known as
a. control
b. convertible
c. restricted
d. affiliate stock
c. restricted
Restricted securities are those acquired through some means other than a registered public offering. Securities purchased via a private placement are an example. These securities may not be sold (are restricted) until they have been held fully paid for 6 months.
A general partner would be considered to have a conflict of interest with the limited partnership if the GP
a. borrows money from business
b. acts as agent making decisions for business
c. manage day to day business
d. is compensated for managing partnership
a. borrows money from the business
The general partner manages the business and acts as agent for the business for which they may receive compensation. They may not borrow from the partnership because this would be considered a conflict of interest.
A registered representative wants to place advertisements in his daughters youth athletic league quarterly sponsorship booklet. He wants to convey in the weekly bulletin at his church that he specializes in retirement planning and 529 plans. Which of the following statements regarding these advertisements is TRUE?
a. The piece will be regulated as correspondence because it is only being forwarded to two organizations
b. No approval is required because both the youth athletic league and the church would be recognized as bona-fide non-profits
c. the advertisement is considered institutional, no approval
d. pre approval by principal of broker dealer is required
d. pre-approval by broker dealer is required
Any piece promoting securities services and / or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be pre-approved by a principal before use. Given the intended placements of the piece there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications.
All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities EXCEPT
a. National securities clearing corporation
b. credit unions
c. carrying firms
d. the depository trust company
b. credit unions
Credit unions cannot serve as a depository or clearing facility for securities transactions.
A hypothecation agreement would be best described as a
a. partnership agreement
b. written disclosure
c. contract allow securities to be pledged for loan
d. loan consent form gives permission to loan customer margin securities
c. contract allowing securities to be pledged for the loan
A signed hypothecation agreement permits the pledging of customer securities as collateral for margin loans.
Which of the following statements regarding $1,000 par value 6.5% bond trading offered at 110 is TRUE?
a. bond current yield is lower than YTM
b. bonds current yield equals 65/1100 or 5.9%
c. bond is offered at discount
d. bonds YTM and stated are same
b. bond current yield equals 65/1100 or 5.9%
This bond is trading at a premium (110 or $1,100). Given the bond is trading at a premium, the current (stated) yield will be higher than its yield to maturity. A bond’s current yield is calculated by dividing its annual interest ($65) by its current (market) price ($1,100), which in this case equals 5.9%
Which if the following may NOT be purchased on margin but can be used as collateral for a margin loan after being held for 30 days?
a. equities
b. warrants
c. mutual funds
d. options
c. mutual funds
Neither mutual funds nor new issues can be purchased on margin. However, both may be used as collateral for a margin loan after being held for 30 days. Options are not marginable securities, but equities, bonds, and warrants are.
Which of following securities is least likely to have an active trading market?
a. limited partnership interest
b. municipal bonds
c. preferred shares
d. REITs
a. limited partnership interest
A disadvantage to limited partnership interests is the lack of liquidity. Of the choices above, direct participation programs such as limited partnership interests are generally deemed illiquid. Whereas municipal debt securities, preferred stock, and REITs are often freely traded in their respective marketplaces.
A company’s business operations are overseen by
a. bondholders placed by BOD
b. stockholders placed by BOD
c. BOD elected by bondholders
d. BOD elected by shareholders
d. BOD elected by shareholders
Most corporations are organized in such a way that their stockholders regularly vote for and elect individuals to a board of directors (BOD) to oversee company business operations.
In order for a registered representative of a member firm to receive any form of compensation, such as commissions, after terminating employment, all of the following statements are correct EXCEPT
a. earnings from referred business by existing clients would be eligible for payment
b. permissible to pay continuing commission to surviving spouse
c. must be contract in effect calling for continuing commissions
d. agreement must be entered before termination of employment
a. earnings from referred business from existing clients would be eligible for payments
Continuing commissions are permitted, but there is no requirement that they be offered. In order for a former registered representative to receive them, the terms must be spelled out in a contract entered into before termination. The contract may call for payment to heirs but cannot provide any compensation for business referred or introduced by an employee after that person ceases to be registered with the member.
A corporation has issued a single bond having successive maturity dates set from 2020 through 2030. This is known as what type of bond?
a. term
b. series
c. balloon
d. serial
d. serial
Serial maturity bonds are all issued at one time and mature in successive years. Note that there is no “series” maturity type.
