Simulated Exam Deck 1 Flashcards

Question

Which of the following regarding open end ( mutual fund) and closed end management investment company is true? A. A closed - end company sets its own dividend ex- date, but an open end company ex date is set by self regulatory organizations ((SRO) B. An open end company may sell fractional shares, but a closed end company may not. C. The price of an open end company shares is shares is set by supply and demand, but not the price of close end shares. D. Only the closed end company may issue additional shares without charging its charter.

Answer 1

B. Open - end shares are redeemable and may be purchase in specific dollar amounts. This results in fractional shares being sold. Closed end shares trade on the open market, and therefore traded in round lots of full shares only. The other choices reverse the characteristics of open and closed end companies. LO 4.a

Answer 2

D. Extension request can be made by the broker dealer but are not mandatorily required. When made to the firms designated examining authority ( DEA), they may or may not be granted. LO 6.g

Answer 3

D. The requirement is normally 50% but not less than $2000, unless the purchase price is less than $2000, then 100% of the purchase price will be required. LO 6.g

Answer 4

D.T-bills are purchased at a discount to par. I’m 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 interest pay interest nor 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. LO 3.e

Answer 5

C. Accounts can be registered in the name of one or more persons, as well as legal entities such as corporations or partnerships. Account registration determines the ownership of the account and who wil have control of the investments in the account.

Answer 6

C. The Roth IRA would require after- tax ( non - deductible) contributions but would allow earnings to accumulate tax deferred as in any retirement plan. Roth IRA distributions need not begin at age 72, and if holding period requirements are satisfied, all distributions are tax free. LO 6.e

Answer 7

C. Mutual fund shares may be purchased in either full or fractional shares. In this example $4000/ $12.34 = 324.15 shares LO 4.b

Answer 8

D. The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placement or the exercise of a corporate stock option. Because this question asked which of the securities were subject to Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However the affiliated person is subject to volume restrictions. LO 2.f

Answer 9

D. The portfolios of both face amounts certificate companies and UITs are non managed. The closest they come to management is when these securities to make up the portfolio are selected. After that, the portfolio does not change. Closed- end companies have an investment advisor who actively manages the portfolio, buying and selling the securities. Lo 4a

Answer 10

C. A FAC is a contract between an investor and an issuer in which the issuer guarantees payment of stated ( face-amount) sum to the investor at some date in the future. In return for this future payment, the investor agrees to pay the issuer a set amount of money, either a lump sum or in periodic installments. LO 4.a

Answer 11

The formula for current yield is the stated rate ( coupon rate) dividend by the current market price. $60 dividend divided by $1,200 equals 5%. LO 8.a

Answer 12

A.Form U5 should be filed within 30 days of termination. LO 12.a

Answer 13

A. A carrying firm has the capability to do trade executions, clear and settle transactions , and take custody of customer funds and securities. A fully disclosed fund is one that introduces its customers business to another firm for the purpose of clearing and setting transactions. Lo 1.e

Answer 14

C.The broker call loan rate is the interest rate banks charge broker dealers on money they borrow to lend to margin account customers. Margin accounts permit customers to purchase eligible securities with out paying in full. Typically, an investor is required to deposit only 50% of the purchase price of eligible common stock with the balance being borrowed. The amount borrowed, as with any loan, is subject to interest payments.

Answer 15

C. City halls are funded by local taxes which is what backs GO bonds.

Answer 16

B. The OCC sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market Lo 5c

Answer 17

The formula for calculating total return is ( income + gains or - losses)/ cost basis. For this question ( $1+3)/20 = 4/20= .20 (20%) Note that this position was held for only one year. LO 8.c

Answer 18

A. For corporate securities, regular way settlement is the trade date ( Friday April 2nd). Plus two business days; therefore, the trade will settle on Tuesday April 6th. LO 1i.

Answer 19

A. Buyers of options pay the premiums for the contracts, and writers ( sellers) receive the prep. If the contract goes unexercised, the buyer loses the premium paid while the seller gets to keep it- a gain Lo 5a

Answer 20

B. Discretion is defined as the authority to decide, what security, the number of shares or units, and white but or sell. Discretion does not apply to decisions regarding only the timing of an investment or the price at which is bought or sold. LO 6.h

Answer 21

B. Because of their short- term maturities, money market instruments are relatively liquid and safe compared with other debt securities. These are considered advantages. The risks how’re, would be lower returns ( a trade-off for the safety) and potentially having to reinvest one’s funds at a different rate each time the instrument matures( short intervals). In this light, not only is income minimal, but it will fluctuate with each new instrument purchased. LO3.f

Answer 22

B. This put option has a zero intrinsic value and is therefore out of the money by the 15 points difference by which the market price exceeds the strike price. A put option has intrinsic value or is in the money when the current market price of the underlying asset is less than the exercise price( in this example, $60) LO 5.a

Answer 23

A. A copy of the account record must be furnished to each customer within 30 days of opening the account. LO 11.k

Answer 24

A. In the case of a non cumulative preferred stock, skipped dividends are forever lost. So, when the company is able to pay a dividend, which is always the case, it must pay the current preferred dividend prior to paying common. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on stock paying $4 annually would be $1- an amount that must be paid before before the quarterly common dividend can be paid. LO 2.d

Answer 25

D. If a potential bond issue it is up for competitive bids, any firm may participate in the bidding process, because the city will select the best arrangement available. If it is a negotiation bid ( non competitive), there is a two- year waiting period because a firm that has made a political contribution might have an unfair negotiation advantage over firms that have not. LO 12.f

Answer 26

B. Having no authority to enforce the rules it enacts, the MS RB relies on FINRA to enforce its municipal securities rules. This would include the enforcement to pay to play rules regarding political contributions. L.O 12.F

Answer 27

A. Securities that have an agreed rate of return, such as bonds, notes, money market instruments, and other debt instruments, are deemed fixed- income securities. Preferred stock acts in many ways like a bond, in that it had a fixed dividend rate, making it a fixed- income security. Common stock may or may not pay a dividend, depending on the board of directors. Common Stock is not deemed a fixed - income security. L0 2.a

Answer 28

Proceeds minus cost basis equals capital gains. The dividends are not part of the calculation for capital gains. LO 8.b

Answer 29

The inside quote is the highest bid ( the highest price someone is willing to buy) paired with the lowest offer, or ask ( the lowest price someone is willing to sell) . In this case, the most someone was willing to pay was 10.25, and the lowest someone was will to sell was 10.45. D LO 1.f

Answer 30

C. If a broker-dealer discovers that a filed Form U5 was inaccurate, an amended form must be filed and sent to the former employee within 30 days of the discovery of the inaccuracy. LO 12.a

Answer 31

The coupon rate, the stated rate, the fixed rate, and the nominal rate all mean the same thing. It is the amount the bond will pay each year. On a premium bond the coupon rate is always higher than the current yield. D

Answer 32

B. Breakeven (BE) for a call is calculated by adding the premium (two) to the strike price (35). In this case, a July 35 call purchased at 2 will be at BE when the stock is at 37. LO 5.a

Answer 33

B. Writing the puts would generate premium income. If the stock declines in value and the option is exercised, the customer will buy the stock at a price lower than where the market is at this moment. The short calls would force him to sell the shares if exercised. Buying out-of-the-money calls costs money and the strike price would be higher than the market. The buy stop does not generate income. LO 5.c

Answer 34

B. Of those listed, only qualified retirement accounts, such as IRAs, prohibit the use of margin. As long as the use of margin is not listed as being restricted, it is allowed in both corporate and partnership accounts, and as long as the use of margin is specifically listed as being allowed, a fiduciary account may do so. LO 6.g

Answer 35

B. By signing the margin agreement, a customer hypothecates (pledges) the securities to the broker-dealer who then rehypothecates (pledges) them to the bank as collateral for the margin loan.

Answer 36

C. 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. LO 4.b

Answer 37

C. For a trade to be unsolicited, the client would need to specifically identify the bonds he wanted to purchase; instead the registered representative is the one who recommended these bonds, making the trade solicited. Suitability must be determined on solicited trades.

Answer 38

C. A debenture and income bonds are examples of unsecured debt instruments. Preferred stock is an equity security and a mortgage bond is secured (collateralized) by real estate.

Answer 39

A. Both open end and close end funds have active management and have an investment advisor managing the portfolio that is paid a fee from the assets of the fund. ETNs are a debt investment, not an equity investment. ETFs meet all of Swenson's criteria.

Answer 40

A. 67 bid for, offered at 67.10 is the quote. The spread is the difference between the bid and offer: 0.10. The bid (67) is the highest price any buyer is willing to pay, and the offer (67.10) is the lowest price any seller is willing to accept. The offer is also known as the ask price. LO 1.f

Answer 41

A. Failure to meet the required minimum distribution (RMD) results in a 50% penalty tax on the shortfall. In this case, taking only $25,000 when $30,000 should have been taken leaves $5,000 exposed to the 50% penalty tax. $5,000 × 50% equals $2,500. Note that the IRS will force the distribution of the RMD shortfall ($5,000). In addition to the penalty, the ordinary income tax on the amount withdrawn must also be paid (20% × $30,000 = $6,000). Total tax liability on this withdrawal equals $8,500 ($2,500 penalty tax plus $6,000 ordinary income tax).

Answer 42

If a customer has not completed the investment within 13 months, they will be given the choice of sending a check for the difference in sales charges or cashing in escrowed shares to pay the difference. D LO 4.b

Answer 43

C.callable preferred is a benefit to the issuer—not the investor—so callable has to pay a higher dividend than the others because the other features are neutral or benefit the investor. LO 2.d

Answer 44

A. Mutual fund shares are redeemable securities. Hence, they do not trade in the secondary market either on exchanges or OTC. Instead, they may be purchased and redeemed only through the mutual fund company itself. LO 4.a

Answer 45

B.For reverse splits, the price goes up and the number of shares goes down. LO 2.h

Answer 46

C. Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor. LO 4.b

Answer 47

D. There is a 10% penalty for early withdrawal. The penalty for missing a RMD is 50% of the amount missed. LO 6.e

Answer 48

A. As long as there are no restrictions against trading on margin in the corporate charter, corporate accounts may trade on margin. LO 6.g

Answer 49

C. 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. LO 5.a

Answer 50

A. 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. LO 2.h

Answer 51

C. While a corporation can have only one IPO, there is no limit to the number of SPOs or APOs it can issue. IPOs, SPOs, and APOs are all primary offerings—those where the offering proceeds go to the issuer. LO 1.a

Answer 52

B. Authorization for discretionary trading must come from both the customer and the firm (represented by a principal). The representative's authorization is not a requirement. LO 6.h

Answer 53

C. When bonds are issued with features that benefit the bondholder, such as a put feature, the issuer can generally pay a slightly lower coupon rate of interest. This is because the put feature compensates the holder in another way, aside from the coupon rate. LO 3.a

Answer 54

D. An inverse relationship exists between bond prices and yields. If the bond is now selling at a premium, the yield to maturity has dropped. The yields from highest to lowest for a premium bond would rank as follows: nominal or coupon yield, current yield, and yield to maturity. LO 3.a

Answer 55

D. Customer complaints is the only record that must be kept for four years. LO 10.g

Answer 56

B. 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. LO 5.a

Answer 57

C. To find the net assets, you subtract the fund's liabilities from the fund's total assets. In this question 330 million – 15 million = 315 million. NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question 315 million / 10 million = $31.5 per share. LO 4.c

Answer 58

A. The uncovered call does not help. If exercised he would have to buy the shares before he delivers them, leaving him flat (no position). The buy stop at 45 would trigger immediately and would become a market order to buy. As there is nothing that indicated he owns the shares now, the sell long would be rejected. The sell stop short at $45 would become a market order to sell the stock short when it trades at 45. LO 1.g

Answer 59

B. 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). LO 5.a

Answer 60

A. This trade, though unsolicited, would still require the representative to disclose the existence of the breakpoint. Unsolicited trades are allowed in mutual funds. The representative's duty is to disclose the existence of the breakpoint, failure to do so is a breakpoint sale. LO 4.d

Answer 61

D. Updated account information must be sent to the customer with 30 days for confirmation upon the opening of the account, at least once every 36 months thereafter, and in the event of the customer notifying the firm of changes in any information shown or listed on the account form. LO 11.k

Answer 62

D. The customer, independent of the registered representative, placed the order, making it unsolicited. While the rep did advise on what an appropriate limit price would be, the customer ultimately placed the order instructions with the limit, and would not be considered discretionary. LO 6.h

Answer 63

A. Unlike a stock, most mutual funds process all purchases and redemptions one time per day. The other points here are all advantages of investing in mutual funds. LO 4.b

Answer 64

A. Regular-way firm-to-firm settlement is two business days after the trade date (T+2). Under Regulation T, payment must be made two business days after the settlement date (S+2 or T+4). LO 6.g

Answer 65

A. A bond trading at $955 is trading at a discount. For a callable bond trading at a discount, the yields in ascending order are as follows: coupon (nominal), CY, YTM, and YTC. LO 3.a

Answer 66

C. Nonsystematic risks are those associated with the issuer (like a bad business strategy). Systematic risks impact large portions of the market and are difficult to reduce by diversification. LO 7.a

Answer 67

A. A municipal advisor acts under contract with a municipality, providing advice on the structure and sale of the municipality's securities. A municipal advisor may not switch from that role to the role of an underwriter on an issue the advisor has consulted on. LO 1.a

Answer 68

If the agreement is not returned signed in 15 days, only closing transactions to offset those positions already open would be allowed.B

Answer 69

C. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements when penny stocks are being solicited. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made at least three penny stock purchases of different issuers on different days. LO 2.a

Answer 70

B. For common shareholders, having a residual right to corporate assets means that they will only be paid in the event of a corporate dissolution if there are any funds left after debtholders and preferred shareholders are paid. LO 2.c

Answer 71

C. The formula for calculating total return is (income + gains or – losses) / cost basis. For this question ($100 + $400) / 5000 = 500 / 5000 = 0.10 (10%). LO 8.c

Answer 72

B. The issuer has no part of this transaction; it is considered a secondary market transaction. It does not matter that Bill did not buy the shares; it matters that he owned them. This is a long sale. LO 1.g

Answer 73

A. Variable annuities are a retirement vehicle that should be funded with available cash not with funds from borrowing or the sale of a different investment. These investments have some degree of market risk. LO 4.f

Answer 74

A. Board of directors (BOD) costs are part of the expenses of a mutual fund and by extension are part of the expense ratio. The expense ratio does not include sales charges or loads. LO 4.c

Answer 75

B. Immediate or cancel (IOC) orders allow partial execution, with the unexecuted portion of the order being canceled. Limit orders may be partially filled. A limit order may be filled in pieces until the end of the day (if a day order), or until cancelled (if GTC). Both FOK and market at open orders are expected to be filled immediately and in their entirety. If unable, a FOK order would be canceled (killed). LO 1.g

Answer 76

B. A reasonable person would see this as a recommendation because the representative went beyond providing information and suggested a course of action. LO 7.c

Answer 77

D. These are state laws that pertain to the issuance and trading of securities within that state. They are known as blue-sky laws because of a statement made by a Kansas Supreme Court justice who referred to "speculative schemes that have no more basis than so many feet of blue sky." LO 1.b

Answer 78

D. The firms whose associates attend the meeting must keep records of all noncash compensation and details of what went on at the meeting. Noncash compensation of this type will inevitably be at least indirectly business-related, but must not be conditional upon agreeing to meet some sales goal. Side trips and expenses of guests must be met by those in attendance, not the host of the meeting. LO 12.f

Answer 79

C. Rights are short term, given to existing shareholders, and allow the holder to purchase shares below current market value (not at a premium). By contrast, warrants are long term, can be bundled with other securities, and allow the owner to purchase shares at a price that is above the current market value at the time the warrants were issued. LO 2.g

Answer 80

A. The steps or order of events to open an options account would occur in the following order: obtain essential facts about the customer, give the customer an options disclosure document (ODD), have the manager approve the account, enter the initial order, and have the customer sign the options agreement within 15 calendar days. LO 5.c

Answer 81

C. Cyclical industries are those that grow during expansions and shrink during declines. Automobiles, home appliances, and heavy equipment are all cyclical industries. Precious metals are the exact opposite—they grow during declines and contract during expansions in the business cycle, and are termed countercyclical. LO 9.c

Answer 82

A. The buyer of the contract pays the premium and loses it if the contract expires. The seller receives the premium and keeps it if the contract expires. The buyer has a right to exercise the contract. It is the seller who has an obligation if the buyer decides to exercise. LO 5.a

Answer 83

C. There is no underlying security to deliver with an index option. The writer of the contract pays the buyer of the contract the in-the-money amount the next business day. Note that a buyer would only exercise a contract if it was in the money. LO 5.b

Answer 84

D. A fully disclosed introducing broker-dealer is what the word implies—it introduces its customers to a clearing firm. Clearing firms (often referred to as carrying firms) hold their customer's funds and securities as well as those of their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office. Because the risk associated with holding customer funds and securities is not present, net capital requirements are much lower for introducing firms than they are for self-clearing or carrying broker-dealers. LO 1.e

Answer 85

A. Many ADRs are listed on exchanges such as the NYSE or Nasdaq. ADRs trade throughout the day and settle in the same manner as would the shares of a U.S.-based company. ADRs are priced in U.S. dollars. LO 2.e

Answer 86

B. Growth in a variable annuity is tax deferred. No tax is due until the growth is withdrawn. Once withdrawn, the growth is taxed as investment income. LO 4.f

Answer 87

A. Trial balances, usually run at the end of a reporting period to ensure that the firm's credit and debit columns arrive at identical sums, must be kept for three years after the trial balance was run. Form BD and amendments are lifetime records, whereas blotters and customer account records are six-year records. LO 10.g

Answer 88

C. To find the net assets, you subtract the fund's liabilities from the fund's total assets. In this question 75 million – 3 million = 72 million. NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question, 72 million / 1.2 million = $60 per share. LO 4.c

Answer 89

A. In return for the call privilege, the corporation may pay a premium exceeding the stock's par value at the time of the call. It's reasonable that a shareholder would expect to receive at least par value or higher in the event of a call. LO 2.d

Answer 90

The broker loan rate or call loan rate is the interest rate banks charge broker-dealers on money that broker-dealers borrow to lend to margin account customers. C LO 9.i

Answer 91

A. When interest rates fall, callable securities are likely to be called. While the investor may receive the redemption proceeds sooner than anticipated, it is often difficult to reinvest while maintaining the same level of return due to the lower interest-rate environment. This is why reinvestment risk and call risk can be viewed as being closely associated with each other. LO 7.a

Answer 92

D. The investor sold the bond for 3⅛points more than the purchase price (101¾ – 98-⅝ = 3⅛). One bond point equals $10; therefore, we know that 3 points is $30, and one-eighth of a point is $1.25. When we add those numbers together ($30 + $1.25), we have a profit of $31.25. LO 3.a

Answer 93

D. If a maintenance call is not met it is the broker-dealer who determines which securities to sell, not the customer. The others are all accurate disclosures found in the margin agreement. LO 6.g

Answer 94

D. When the FOMC directs that Treasury securities be purchased in the open market, this will loosen the money supply; securities come out of the economy and money goes in to the economy. More money available lowers interest rates to consumers. LO 9.h

Answer 95

A. This is a Green Shoe offering, based on a rule first used in the IPO for the Green Shoe Manufacturing Company (now known as Stride-Rite). A shelf offering occurs when the shares may be held and sold later under Rule 415. The other names are fictional. LO 1.b

Answer 96

A. Open end funds can issue an unlimited number of shares. Closed end funds have a fixed number of shares. The other three choices are true of both open and closed end funds. LO 4.a

Answer 97

D. The consent to a loan agreement is not a regulatory requirement. Note this is a new account, so the regular account agreement is required in addition to the margin documents. LO 6.g

Answer 98

D. This is the basic definition of strike price. The cost per share of the contract is the premium. The breakeven is the price point of the underlying security where an investor has neither a gain nor a loss. There is no expiration price; there is an expiration date.

Answer 99

A. You may only contribute earned income to an IRA, not investment income. The most he may contribute is $2,400, based on his earned income from the part-time job. ROTH IRA contributions are not deductible. LO 6.e

Answer 100

D. Maintenance requirements are set by the governing SRO. FINRA is the best answer of this set. FRB sets the initial margin requirement along with the SRO minimum. The FRB does not set maintenance requirements. LO 6.g

Answer 101

D. Contributions are not deductible. They are made with after-tax dollars and may continue past age 59½ if still working. Roths are not subject to RMDs. LO 6.e

Answer 102

A. The risk disclosure document is required before opening the account and annually after opening the account. LO 6.g