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46 Cards in this Set

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How long after a new issue is registered for sale will it be shown on the Nasdaq system?
a. On the effective date
b. 10 days after the effective date
c. 30 days after the effective date
d. 45 days after the effective date
D
A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public. (12-2)
The 5% markup policy applies when a member is acting as:
a. An investment banker
b. A mutual fund underwriter
c. A broker-dealer in the OTC market
d. A specialist on the floor of the NYSE
C
A broker is an agent acting for another party and receives a commission when a trade is executed. A dealer is a principal acting for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% markup policy which is a guide broker-dealers in the OTC market must follow. The 5% markup policy covers all transactions except those requiring a prospectus (i.e., the sale of anew issue, mutual fund, and registered secondary). If a member was acting as an underwriter (sponsor), it would be involved in a new issue and if acting as a sponsor it would be involved in the sale of a mutual fund. Since both of these transactions require a prospectus, they would not be covered by the 5% markup policy. Specialists on the floor of the NYSE are regulated by a different rule. (12-3)
A customer wishes to buy stock in a closely held corporation with a small amount of outstanding shares. The registered representative should advise him:
a. That it is a good investment
b. That he will receive a greater percentage ownership and it is a good investment
c. About the risks inherent in buying "thin" issues because of the probability of wide price fluctuations and possible difficulties in selling the stock because of the small amount of outstanding shares
d. About the profit possibilities in a rising market
C
The registered representative should inform the customer of the risks involved in buying "thin" issues because of the probability of wide price fluctuations (volatility) and because of the small amount of the shares outstanding. (12-20)
According to the MSRB rules, which of the following would cause a broker-dealer to reject the delivery of municipal bonds?
a. A legal opinion is attached to, rather than imprinted on, the bonds.
b. Registered bonds are expected and delivered with proper endorsement.
c. Bearer bonds are delivered in $5,000 denominations.
d. The bonds have been called by the issuer.
D
Good delivery for municipal bonds, unless otherwise specified, requires delivery of bonds not subject to a partial call and an imprinted or attached legal opinion. (Partially called bonds are not considered good delivery.) The bonds may be in bearer or registered form. Bearer bonds may be delivered in $1,000 or $5,000 denominations. If delivery of registered bonds is expected, they must be properly endorsed and in any denomination from $1,000 to a maximum of $100,000, in $1,000 increments. (12-31)
All of the following are Bond Buyer Indexes EXCEPT:
a. The average yield on 25 revenue bonds with 30-year maturities
b. The average yield on 20 selected municipal bonds with 20-year maturities
c. The average yield on 11 selected municipal bonds with 20-year maturities
d. The total of all new issues scheduled to be sold during the upcoming 30 days
D
The Bond Buyer computes and publishes a number of indexes which include the 20-Bond Index (choice B), the 11-Bond Index (choice C), and the Revenue Bond Index (choice A). Choice D is not an index, but is the Visible Supply. (12-27)
REVENUE BOND INDEX (S7) : The average yield (on a particular day) on twenty-five selected revenue bonds with thirty-year maturities. It is computed on Thursday afternoon and published in The Bond Buyer on Friday.
Which of the following best represents the placement ratio?
a. Total par value of new issues sold during previous week divided by Total par value of new issues issued during previous month
b. Total par value of new issues sold during upcoming month divided by Total par value of new issues issued during previous month
c. Total par value of new issues sold during previous week divided by Total par value of new issues issued during previous week
d. Total par value of new issues scheduled during the upcoming 30 days
C
The placement ratio is published weekly by the Bond Buyer. It expresses the amount of bonds sold by new issue syndicates as a percentage of the total amount of new issues brought to market during that week. (12-26)
PLACEMENT RATIO (S7) : A statistic published in the Bond Buyer showing the ratio of the par value of new issues sold (placed) compared to the total par value of new issues that came to market during a one-week period.
A municipal broker's broker can:
I. Deal with broker-dealers
II. Deal with dealer-banks
III. Underwrite new issues
IV. Trade from its own inventory
a. I and II only
b. I and III only
c. II, III, and IV only
d. I, II, III, and IV
A
A municipal broker's broker is a broker (agent) that deals only with other municipal securities brokers or dealers. The broker's broker would never deal with individual investors, establish an inventory position, or be involved in the underwriting of a new issue. (12-25)
The 30-day visible supply of municipal securities refers to new municipal bonds that:
a. Will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds
b. Have been sold through a negotiated sale in the past 30 days
c. Will be sold in the next 30 days through a negotiated sale of general obligation and revenue bonds
d. Will be sold in the next 30 days through a competitive sale of general obligation and revenue bonds
A
The 30-day visible supply of municipal securities refers to the face amount of new municipal bonds that will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds. It is an indication of expected supply in the new issue market and is published each day in the Bond Buyer. (12-26)
A brokerage firm's research department has issued a buy recommendation for XYZ Corporation's common stock. The report must contain all of the following information EXCEPT:
a. The firm was the managing underwriter in a recent public offering of the stock
b. The number of shares the firm owns of the stock
c. The partners of the firm hold options to purchase the stock
d. The firm makes a market trading in the stock
B
The report must contain all of the items listed except the number of shares the firm owns of the stock. The firm does need to disclose that it owns shares of the stock, but not the actual number. (12-16)
The third market is concerned with:
a. OTC securities only
b. Listed securities only
c. NYSE-listed securities traded in the OTC market
d. U.S. government securities traded OTC
C
The "third market" is the term used to describe a situation where a security listed on the NYSE is traded in the OTC market. (12-7)
Which of the following can be traded in the over-the-counter market?
I. Municipal bonds
II. Treasury bonds
III. Treasury bills
IV. Corporate bonds
a. I and II only
b. II and III only
c. I and IV only
d. I, II, III, and IV
D
All of the securities listed can be traded in the over-the-counter market. (12-1)
All of the following would be a good delivery in the sale of 500 shares of common stock EXCEPT:
a. One five-hundred-share certificate
b. Five one-hundred-share certificates
c. Ten fifty-share certificates
d. Four fifty-share certificates and ten thirty-share certificates
D
Delivery must be made in 100-share certificates, multiples of 100, or any combination which adds up to 100 shares. In choice (D), four certificates of fifty shares would be acceptable, but 10 thirty-share certificates would not be, since 30-share certificates cannot be combined to add up to 100 shares. (12-14)
For secondary market transactions, a municipal securities broker-dealer may use a broker's broker to:
I. Disseminate the availability of the securities
II. Sell securities but remain anonymous
III. Increase the market price of the securities
IV. Guarantee a profit on a trade
a. I and II only
b. I and III only
c. I, II, and III only
d. II, III, and IV only
A
A municipal securities broker-dealer may use a broker's broker to help sell bonds. Using a broker's broker will allow for good exposure to the market for the bonds. The broker's broker also keeps the identity of its client confidential. A broker's broker does not divulge the contra party's name to the buyer or seller. (12-25)
Which of the following would NOT be allowed under MSRB rules?
a. A gift of basketball tickets to a customer valued at $100
b. A business dinner with a client costing $135
c. Reserving a hotel room for a client at a municipal bond seminar costing $150
d. A Christmas gift to a client valued at $125
D
MSRB rules prohibit gifts in excess of $100 per year to a person other than an employee or partner of the gifting individual, if such payments or services are in relation to the municipal securities activities of the employer, of the recipient, of the payment or service. (Therefore, a Christmas gift to the client valued at $125 would not be allowed.) However, costs incurred for business lunches or hotel accommodations for clients at business seminars are business expenses and are allowed as long as they are not frequent or excessive. (12-17, 12-34)
An investor purchased T-bonds that mature January 1, 2012. He purchased the T-bonds on Friday, February 20, for regular-way settlement. How many days of accrued interest did the investor owe?
a. 51
b. 53
c. 54
d. 55
B
Accrued interest is calculated from the last interest payment date up to but not including settlement date. The last interest payment was made January 1st (since maturity is January 1, 2012, interest payments are every January 1st and July 1st). The settlement date is Monday, February 23rd (a transaction for government securities settles on the next business day). Government securities accrue interest on actual days elapsed. The investor would therefore owe 31 days for January and 22 days for February (not including settlement date) for a total of 53 days. (12-24)
A registered representative has established a discretionary municipal bond account for Mr. Smith. Which of the following may the registered representative purchase for Mr. Smith's account?
a. General obligation bonds only
b. Bonds rated Baa or higher only
c. Double-barreled bonds only
d. Any suitable bonds
D
A registered representative must be sure that the bonds purchased are suitable. (12-30)
According to MSRB rules, which of the following must be disclosed to a customer in a negotiated sale of municipal bonds?
I. The amount of the underwriting spread
II. The initial offering of each maturity
III. Any fee received as agent for the issuer
IV. The name of the underwriter's counsel
a. I and II only
b. II and IV only
c. I, II, and III only
d. I, II, III, and IV
C
According to the MSRB rules, in a negotiated sale of municipal bonds, the customer must be informed of the amount of the underwriting spread, the initial offering of each maturity, and any fee received as agent for the issuer. (12-28)
Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules?
I. An employee of a municipal securities firm can open a new account with another municipal securities firm without the employer being notified.
II. An employee of a municipal securities firm can open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual's employer.
III. A bond attorney can open a new account without restriction.
IV. An officer of a municipal issuer can open a new account without restriction.
a. I and III only
b. II and IV only
c. III and IV only
d. II, III, and IV only
D
MSRB rules only place restrictions on opening an account for an employee of another MSRB member firm. When opening an account for an employee of another MSRB member firm, the employer must be notified and duplicate confirmations of all trades must be sent to the employer. (12-30)
All of the following should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction EXCEPT:
a. The costs involved in executing the trade
b. The dollar value of the security
c. The cost price of the securities held in inventory by the dealer
d. The availability of the security
C
All of the choices given should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction except the cost price of securities held in inventory by the dealer. The price charged should be based on the current market price, not the cost of the inventory position. (12-3)
A client is notified by his broker-dealer that certain trades may be executed by an Electronic Communication Network (ECN). Which two of the following are risks of using this type of system?
I. Trades are not subject to SRO regulations
II. Limited ability to execute transactions
III. Higher commissions
IV. System may only accept certain types of orders
a. I and III
b. I and IV
c. II and III
d. II and IV
C
Some broker-dealers use ECNs to execute customer orders. ECNs act as matching systems to execute orders from subscribers. Some broker-dealers will use a market maker during normal business hours and an ECN to execute trades after normal business hours (after 4 p.m.). If the system cannot match a buyer and seller, a client's order can have a limited ability to be executed. Some ECNs will only accept certain types of orders, such as limit orders. Trades would be subject to SRO regulations and the commissions clients are charged would generally not be higher if a broker-dealer used an ECN. (12-8)
A FINRA member subscribing to CQS, calls a market maker displaying a quote on the system and executes a trade. This transaction would be considered to have occurred in the:
a. Primary market
b. Private market
c. Third market
d. Fourth market
C
CQS displays quotations by members for NYSE and AMEX listed securities. Transactions in listed securities between FINRA members in the over-the-counter market are considered third market transactions. Although executed in the over-the-counter market, such transactions must still be reported to the Tape. (12-8)
Joseph Carlyle is a customer of a municipal securities firm. Based on his existing account documentation, he is clearly unsuitable for any securities with a speculative credit rating. However, he has entered an order to purchase a bond that is rated BB by Standard and Poor's. His representative, Bob Thomas, has communicated to him that this transaction is not in his best interest based on the information that the firm has on file. Regarding this situation, which of the following statements is TRUE?
a. Bob should process the order because a BB rating is not speculative.
b. Bob should process the order because MSRB rules allow the order to be filled if the rep explains to Joseph that the trade is unsuitable.
c. Bob should process the order because registered reps are not fiduciaries and therefore must always do what the customer says.
d. Bob should not process the order because MSRB rules prohibit the processing of a clearly unsuitable transaction.
B
According to recent interpretations of the MSRB's suitability rule, Bob should process the customer's order as long as he takes the time to explain to Mr. Carlyle why he believes the investment is unsuitable for him. (12-30)
An employee of a municipal securities firm would like to open an account with another municipal securities firm. All of the following statements regarding the employee and the account are TRUEEXCEPT:
a. The employer must receive duplicate copies of all transactions made in the account
b. The employer must be notified about the opening of the account
c. The employer must be notified in writing of the employee's intention to open the account
d. The employer must approve each transaction before the execution of the transaction
D
All of the statements listed regarding the employee and the account are true except the employer must approve each transaction before the execution of the transaction. This statement is not true because prior approval is not required. (12-30)
A municipal securities principal must approve:
I. Memos in response to customer complaints
II. The opening of accounts
III. Advertisements to be used for a seminar
IV. Correspondence to customers
a. II only
b. II and III only
c. I, II, and IV only
d. I, II, III, and IV
D
MSRB rules require a municipal securities principal to approve all the choices given. In addition, the principal must approve all transactions and must frequently review all discretionary accounts. (12-29, 12-32, 12-33)
Which of the following is NOT a characteristic of an electronic communication network (ECN)?
a. ECNs will act as market makers.
b. ECNs permit trading electronically.
c. ECNs permit trading anonymously.
d. ECNs permit trading after-hours.
A
Electronic communications networks allow market participants to display quotes and execute transactions. These participants are referred to as subscribers and pay a fee to the ECN in order to trade electronically through the system. ECNs allow subscribers to trade after-hours, quote and trade without disclosing their name (anonymously). ECNs will act in an agency capacity and will not buy or sell for their own account like a market maker. (12-8)
An over-the-counter trader, when talking about the spread, is referring to:
a. The difference between the bid and asked price of a stock at the current market
b. The difference between his cost price and his selling price
c. The amount of his markup from his cost price
d. The 5% markup which is allowable under the Conduct Rules
A
The over-the-counter trader, when referring to the spread, is referring to the difference between the current bid and asked price of a stock. (12-3)
SPREAD (S7) :
(1) The difference between the bid and offer price of a security.
(2) The difference between the public offering price of a new issue and the proceeds received by the issuer; the underwriting spread.
(3) The purchase and sale of puts or calls on the same underlying security with different expirations and/or strike prices.
According to SEC rules, a stock that sells for $5 or less, that is not on the Nasdaq system or listed on an exchange, is known as a(n):
a. Restricted security
b. Control stock
c. Penny stock
d. Exempt security
C
A penny stock, according to SEC rules, is a stock that sells for $5 or less, that is not on the Nasdaq system or listed on an exchange. (12-20)
Municipal bearer bonds that are in default of interest trade:
a. With unpaid coupons attached
b. Without unpaid coupons attached
c. In registered form only
d. Without a legal opinion attached
A
Municipal bonds that are in default, trade flat (without accrued interest) and must be delivered with all unpaid coupons attached. If the bonds begin paying interest, the present holder is entitled to the past interest payments. (12-29)
What is a fidelity bond?
a. A noncallable municipal bond
b. A nonconvertible corporate bond
c. Insurance purchased by broker-dealers to protect them against fraud
d. Insurance protecting customers in the event of a broker-dealer bankruptcy
C
Every broker-dealer is required to have a fidelity bond which provides insurance in the event of a fraud judgement against the broker-dealer. (12-13)
FIDELITY BOND (S7) : An insurance policy required of every broker-dealer to provide protection for the firm in the event of fraud or theft by broker-dealer employees.
All of the following would be considered of material value by FINRA if given by a mutual fund underwriter to a registered representative EXCEPT:
a. A gift of $100
b. A gift of $200
c. "Overrides" in excess of commissions as stated in the prospectus
d. A gift of $500
A
According to industry rules, a gift of more than $100 would be considered substantial or of material value. (12-17)
All of the following are TRUE of quotes for municipal bonds EXCEPT:
a. They can be nominal quotes
b. They can be subject quotes
c. They can be firm quotes
d. They must be written quotes
D
All of the choices given about municipal bond quotes are true except they must be written quotes. MSRB rules relate to quotes which are communicated or published in any manner. (12-31)
All of the following must appear on a confirmation to a customer in a municipal trade EXCEPT:
a. The capacity in which the broker-dealer acted
b. The par value of the bonds
c. A description of the bond
d. The bond rating
D
MSRB rules require that a customer confirmation contains the par value and complete description of the bonds including coupon, maturity, and pertinent call features. The principal amount, accrued interest, and total amount must also be included. The firm must disclose whether it acted as a principal or agent and if acting as an agent, the firm must disclose the amount of the commission. Although some firms include the rating of the bond, it is not required. (12-30)
A municipal dealer may guarantee a customer against a loss:
a. If the dealer has discretion over the account
b. If the account is a cash account
c. If the account is a margin account
d. Under no circumstances
D
A municipal dealer may not guarantee a customer against a loss under any circumstances. (12-30)
According to MSRB rules, a municipal bond dealer may not consider which of the following factors when determining a markup?
a. Expenses
b. Profit
c. Coupon
d. Total dollar amount of the transaction
C
All of the choices given would affect the markup except the coupon rate of the securities. (12-30)
A municipal bond would be accepted for delivery without a legal opinion if it were identified as:
a. In default
b. Registered
c. Mutilated
d. Ex-legal
D
A municipal bond is expected to be delivered with a legal opinion unless the bond was identified as ex-legal at the time of the purchase. (12-29)
An investor purchases a U.S. Treasury bond in the secondary market. When is settlement?
a. Next business day
b. 3 business days
c. 5 calendar days
d. 5 business days
A
Transactions for Treasury securities will settle on the next business day. (12-24)
The Bond Buyer's 30-day visible supply includes:
I. Competitive municipal bond issues
II. Negotiated municipal bond issues
III. Treasury bill issues
IV. Corporate bond issues
a. I and II only
b. I and III only
c. II and IV only
d. I, II, III, and IV
A
The Bond Buyer's 30-day visible supply is an indication used to reflect the amount of new offerings coming to the marketplace in the next 30 days. It carries figures for both competitive and negotiated municipal bond issues and notes maturing in 13 months or more. (12-26)
VISIBLE SUPPLY (S7) : The total par value of all competitive and negotiated issues scheduled to come to market during the upcoming thirty days, and published each day in the Bond Buyer.
A municipal dealer would violate MSRB rules if it gave a quote which was:
a. Specified as AON
b. Bona fide
c. Nominal and not specified as such
d. Identified as a subject quote
C
MSRB rules require that any quote be bona fide (firm at the time given). Nominal or subject quotes are permitted if they are identified as such at the time given. (12-31)
A charge to a customer for the collection of dividends, holding of securities, and other services must be:
a. Reasonably fair and not discriminate between customers
b. No more than 1/2 of 1% of the customer's free credit balance
c. No more than 5% of the value of the securities
d. At least 1% of the value of the securities
A
Under industry rules, a brokerage firm is allowed to charge a customer for collection of dividends, holding of securities, and other services. Most brokerage firms do not charge for these services, but if they do charge, the amount must be reasonably fair and not discriminate between customers. (12-4, 3-1)
An OTC market maker would justify the amount of his markup based on all of the following EXCEPT:
a. Current price
b. Dollar value of the trade
c. His cost
d. Availability of the securities
A
The amount of markup should be based on the current market price of the security, not the market maker's cost. (12-3)
A transaction occurs between two dealers for a Nasdaq stock. The trade must be reported by:
a. The buyer within 30 seconds
b. The seller within 30 seconds
c. Both within 30 seconds
d. Both by the end of the day
B
Transactions in Nasdaq stocks must be reported to FINRA by the seller within 30 seconds of the trade. (12-8)
A municipal dealer gives another dealer a firm quote of par for a block of municipal bonds. The dealer that gave the quote:
a. Must do the trade at par
b. Must give the other dealer ten minutes to accept the quote
c. Has given a nominal quote to the other dealer
d. Has given a subject quote
A
The dealer that gave the firm quote must do the trade at par. (12-31)
Which of the following is an indicator of the demand for municipal bonds in the primary market?
a. The Wilshire Index
b. The Visible Supply
c. The Placement Ratio
d. The Bond Buyer Index
A
The Placement Ratio is published weekly in the Bond Buyer and Credit Markets. It shows the percentage of new competitive issues that have been placed (sold) to investors for the week. It is considered to be an indicator of demand in the new issue market. (12-26)
PLACEMENT RATIO (S7) : A statistic published in the Bond Buyer showing the ratio of the par value of new issues sold (placed) compared to the total par value of new issues that came to market during a one-week period.
A registered representative that previously was the CEO of a cosmetics company wants to send a report to clients. She will include detailed information concerning individual equity securities of cosmetics companies she feels are good investments. Although the report analyzes different stocks she feels are attractive investments, it does not contain a recommendation. Which of the following statements is TRUE?
a. This is not a research report since the report does not contain a recommendation.
b. This is a research report and would require approval.
c. This is not a research report since the RR does not hold the title of a research analyst.
d. This is a research report but would not need to be approved.
B
A registered representative does not need to hold the title of research analyst in order for the report to be considered a research report. If the report provides sufficient information concerning individual equity securities for a client to make an investment decision and is distributed to clients, it would be considered a research report. A research report must be approved by a supervisory analyst and contain the proper disclosures. (12-16)
A broker-dealer appears on the Nasdaq system as a market maker for DCIR common stock. An employee of the firm responsible for maintaining the firm's inventory in DCIR is known as a:
a. Specialist
b. Floor broker
c. Compliance director
d. Position trader
D
A position trader is responsible for maintaining a broker-dealer's inventory as well as trading the firm's account. (12-1)
According to MSRB rules, each broker-dealer engaging in municipal securities activities must have a municipal securities principal promptly review and/or approve in writing:
I. Each customer account for trading in municipal securities
II. Every transaction for municipal securities
III. All written customer complaints
IV. All advertising and other written correspondence pertaining to municipal securities activities
a. I and II only
b. III and IV only
c. I, III, and IV only
d. I, II, III, and IV
D
A municipal securities principal is responsible for supervising activities relating to municipal securities transactions. Included in his responsibilities are the review and/or approval of all the choices given. (12-33)