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37 Cards in this Set
- Front
- Back
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Cumulative voting is considered to be an advantage to the:
A. large investor B. institutional investor C. small investor D. novice investor |
The best answer is C. Cumulative voting allows a disproportionate voting weight to be placed on selected directors and is considered to be an advantage for the small investor who wishes to have specific directors elected.
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The "Trade-Through" rule of Regulation NMS applies to all of the following EXCEPT:
A. NYSE issues B. NYSE-MKT (AMEX) issues C. NASDAQ issues D. OTCBB issues |
The best answer is D.
Rule 611 of Regulation NMS (National Market System) prohibits an exchange from "trading through" the better priced quote of another market (including Third Market Makers and ECNs). Thus, all exchanges must be linked so that the trade execution will always occur at the NBBO (National Best Bid and Offer prices). If another market is posting a better priced quote, the exchange that receives the order must fill the order at the better price, or must route the order to that market for a fill. Regulation NMS applies to NYSE, NYSE-MKT (AMEX), and NASDAQ listed issues. These are all markets that can electronically update and access quotes for trade execution within 1 second of order receipt. The rule does not apply to OTCBB or Pink Sheet issues, where the markets are much less liquid and trades are still done manually. |
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All of the following paperwork is customarily needed to open a margin account EXCEPT:
A. Margin agreement B. Loan consent agreement C. Joint account agreement D. Credit agreement |
The best answer is C. To open a margin account, the customer must sign a margin agreement (this can also be termed the customer's agreement or hypothecation agreement - where the customer pledges the securities to the broker in return for the margin loan); the customer is asked to sign a loan consent agreement, allowing the broker to lend out the customer's securities for short selling by other customers of the firm; and the customer must sign a credit disclosure agreement, which explains how the loan balance is computed and how interest will be charged on the loan. Joint account agreements are only signed if there will be more than 1 person owning the account.
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The primary purpose of the Trust Indenture Act of 1939 is to: C. protect the interests of charitable trust beneficiaries by appointment of a trustee |
The best answer is A. The primary purpose of the Trust Indenture Act of 1939 is to protect corporate bondholders from being taken advantage of by the issuing corporation. It provides for the appointment of a substantial independent trustee to protect the interests of the bondholders. Since we tend to trust our government (plus, the legislators write the laws!), issues of governments and municipalities are exempt from this Act.
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A customer would ask for a bond appraisal when selling a municipal bond:
I because there is little or no active trading market for municipal bonds II because there is an active trading market for municipal bonds III to obtain an indication of the likely market price of the bond IV to obtain a firm bid on the bonds A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A. Municipal dealers are often asked for bond appraisals by customers who wish to sell bonds. Because there is no active trading market for municipal bonds, last trading price information is not available. To get an idea of the value of the bond, the dealer will get prices of similar bonds and then give an estimated price to the customer. This is a likely sale price - not a firm quote.
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The market sentiment of a customer who sells a "call spread" is:
A. bullish B. bearish C. neutral D. volatile |
The best answer is B. A sale of a "call spread" is similar to simply selling a call. In a falling market, the calls expire "out the money" and the profit is the premium received. The difference is that a short call gives unlimited upside loss potential in return for the premium received. A short call spread gives limited upside loss potential in return for a lower premium received.
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Which statement is TRUE regarding the relationship between Acco Fund's Net Asset Value and closing price? B. The closing price is lower than Net Asset Value because of the redemption fee charged to investors C. The closing price is lower than Net Asset value because sellers exceed buyers on the exchange floor D. The closing price is lower than the Net Asset Value because buyers exceed sellers on the exchange floor CLOSED END BOND FUNDS Fund Net Asset Value Stock Close NAV Change Acco$8.328.13 -.08Acme$9.9010.25 +.10Adap$7.457.50 -.01 |
The best answer is C. Closed-end funds can trade at a discount to Net Asset Value when investors become disenchanted with the fund. This will occur if the fund gives an inferior return. Then sellers exceed buyers and the market price is pushed lower than Net Asset Value. A similar thing happens to regular companies' stocks when they sell below book value.
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In 2015, a customer earns $500,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $25,000 per year. The contribution to be made for the nurse is:
A. $0 B. $2,500 C. $5,000 D. $6,250 |
The best answer is D.
If an employer earns $265,000 or more and contributes the maximum of $53,000 to a Keogh in 2015, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. If the employer earns $500,000 and contributes $53,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $265,000. $265,000 - $53,000 = $212,000 of "after Keogh deduction" income. $53,000/$212,000 = 25%. Thus, for the nurse, $25,000 of income x 25% = $6,250 contribution. |
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If a corporation calls its convertible preferred stock that is trading at a premium in the market due to a rise in the price of the common stock, at par, which of the following statements are TRUE?
I The corporation is advance refunding the issue II The corporation is forcing the shareholders to convert into common shares III If the shareholders continue to hold the preferred stock, dividend payments will be made as scheduled IV If the shareholders continue to hold the preferred stock, they will not receive any dividend payments A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. If a corporation calls its convertible preferred stock that is trading at a premium in the marketplace due to a rise in the price of the common stock, at par, it is forcing the preferred shareholders to convert. If the preferred shareholder tenders, he or she receives par. If he or she converts, he or she receives common shares that are worth more than par (since the common stock price has risen, and this has caused a direct increase in the price of the convertible preferred stock). Continuing to hold the preferred makes no sense, since dividend payments cease once the issue is called. Thus, the most profitable alternative is to convert - the issuer is "forcing conversion" of the preferred shares.
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A customer, age 60, is looking for an investment that will provide life-long income at retirement. The BEST recommendation would be for the customer to:
A. purchase a variable annuity and annuitize the separate account at retirement B. purchase a variable annuity and take installments of a designated amount at retirement C. invest in an income mutual fund and elect not to automatically reinvest distributions D. invest in a GNMA fund since GNMAs make monthly payments |
The best answer is A. The benefit of an annuity contract to an older person is the assurance of receiving income for life - however this only happens if the customer annuitizes the contract. If the customer chooses installments, there is no guarantee of payments for life - when the money in the account is depleted, payments stop.
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A registered representative wishes to give a speech about investments in growth stocks versus value stocks. Which of the following statements are TRUE regarding the speech?
I The speech must be approved in writing by a compliance officer or principal II The speech should be informational, not promotional in nature III The speech can contain comparisons of past performance of recommended investments to that of recognized market indices IV A written copy of the speech must be retained by the member firm for 3 years A. I and II only B. III and IV only C. I, II, and IV D. I, II, III, IV |
The best answer is D. The content of all speeches given must be approved, in advance, in writing, by the firm's compliance officer or principal and retained for 3 years. A speech is defined as an item of sales literature. There is no prohibition on comparing performance to that of a recognized benchmark, such as the Standard and Poor's 500 Average - this is the industry norm. All speeches are supposed to be informational, not promotional, in nature.
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Which of the following are considered in determining a fair and reasonable price in a municipal agency transaction? II Expenses associated with effecting the transaction D. I, II, III, IV |
The best answer is D.
The MSRB Fair Pricing Rule states that the factors that should be considered when pricing a municipal bond for BOTH agency and principal transactions are the: * best judgment of the fair market value of the security;* expense of filling the order; * fact that the firm is entitled to a profit; * availability of the security; * value of services rendered in effecting the trade * maturity, rating and call features of the security; * nature of the dealer's business; and * existence of material information about the issuer. * price of the transaction; |
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A municipal bond originally issued at par, is trading in the market at 90. The bond has 10 years to maturity. If the bond is sold after 8 years at 99, the tax consequence per bond is:
A. no tax due B. $10 of taxable interest income C. $80 of taxable interest income and a $10 capital gain D. a $90 capital gain |
The best answer is C.
If a municipal bond is issued at par, and subsequently goes to a discount in the market (for example if interest rates have risen), then the market discount is treated as taxable interest income, earned over the remaining life of the bond. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The holder has the option of accreting the discount each year and paying tax for that year, or of waiting to maturity, or the sale date of the bond, to pay tax on the accreted discount as interest income earned. If the bond is sold for more than the accreted amount, there will be a capital gain; if it is sold for less than the accreted amount, there will be a capital loss. This bond was purchased at 90, with 10 years to maturity. Thus, the discount is earned at the rate of 1 point per year. After 8 years, the discount is accreted to 98, with the 8 points ($80) being treated as taxable interest income. The bond is sold for 99, with the 1 point ($10) difference (between 98 accreted value and 99 sale price) being a capital gain. |
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A Specialist (DMM) on the NYSE shows the following orders for ABC stock on his book: $50.05 - $50.07
The Specialist/DMM in ABC stock receives a market order to sell 1,000 shares. The Specialist/DMM can take which of the following actions? I The Specialist/DMM can fill the order from his own account at $50.05 A. I and III C. II and III |
The best answer is C. The Specialist (now called the DMM - Designated Market Maker) is quoting the stock at $50.05 Bid with a size of 30 (good for 30 x 100 = 3,000 shares); and $50.07 Ask with a size of 60 (good for 60 x 100 = 6,000 shares). These are the next orders to be filled on the Specialist's/DMM's book. If the Specialist/DMM receives a market order to sell for 1,000 shares, the Specialist/DMM can either fill that order at the current bid price of $50.05 against the book; or, if the Specialist/DMM wishes, the Specialist/DMM can "improve" the price of the order by buying from the customer into its inventory price at a price that is better (higher) than $50.05, such as at $50.06.
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A customer buys 1 XMI June 515 Call @ $4 and sells 1 XMI June 495 Call @ $19 when the Major Market Index closed at 505. A profit will be realized when: B. I and III |
The best answer is B. The customer has taken the following positions: Sell 1 XMI Jun 495 Call@ $19Buy 1 XMI Jun 515 Call@ $ 4 $15CreditMarket Value - XMI = 510
The customer receives a net $15 credit in his account, so this is a credit spread - a short call spread (bear spread). Credit spreads are profitable if both sides expire unexercised (keeping the $15 credit), or if the spread between the premiums narrows. Then the spread can be closed at a smaller debit for a profit. If both sides are exercised, the customer must deliver the index at 495, but will "buy" the index at 515 for a 20 point loss. Since 15 points were received in premiums, the customer has a net loss of 5 points. To breakeven, the customer must lose the 15 point credit. Since this is a short call spread, breakeven occurs from the short call position. 495 short strike price + 15 point credit = 510 breakeven. If the market goes below 510, any loss on exercise of the short call is exceeded by the net premium received for a gain (the long call expires out the money). If the market rises above 510, the loss on the short call exceeds the net premium received, with the loss being limited by the strike price on the long call. |
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Which of the following statements are TRUE about CMOs in a period of rising interest rates? II CMO prices fall faster than similar maturity regular bond prices |
The best answer is C. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster.
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When the market is reaching an "overbought" condition, which of the following statements are TRUE? |
The best answer is C. An overbought condition in the market occurs when the market price averages are increasing daily, but the strength of the market (the number of issues advancing versus the number of issues declining) is weakening. The market is reaching an "overbought" condition, and is approaching a peak. Thus, the next market move is likely to be a decline.
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An assessment of an existing client's financial status shows the following: Home Ownership:No - Currently rents at $3,000 per month Client Balance Sheet: Cash on Hand:$20,000 The customer has decided to purchase a home instead of renting. The price of the home is $750,000 and the customer intends to put down 20% and obtain a mortgage for the balance. The customer explains that he will need the $150,000 down payment in 30 days. The best recommendation to the customer is to liquidate his: A. growth stocks and blue chip stocks immediately in the amount of $150,000 to obtain the necessary cash down payment B. growth stocks and blue chip stocks in 30 days in the amount of $150,000 to obtain the necessary cash down payment |
The best answer is A. Since this customer needs $150,000 in cash within 30 days for the down payment on the house, the best thing to do is to liquidate his stock positions now (not in 30 days) to get the funds for the down payment. If the customer waited 30 days, these stock positions could suffer a market loss, making it hard to fund the down payment. Liquidation of the pension assets makes no sense, since the customer is 41 years old and must pay regular income tax plus a 10% penalty tax on the liquidation. Net Worth cannot be "liquidated" - it is simply the value left over when all assets are subtracted from all liabilities.
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An account is opened "joint tenants with rights of survivorship". Which of the following statements are TRUE?
I If one party to the account dies, the other party wholly owns the account II Orders may be given by either party III Checks can be drawn in the name of either party IV Mail can be sent to either party A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV |
The best answer is C. Any checks drawn on an account are made out to the full account name. If it is a joint account, the names of the parties on the account will be on the check - not just one of the parties. In a joint account, orders can be entered by either party; mail can be sent to either party, and in an account with rights of survivorship - if one party dies, the other party wholly owns the account.
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During periods when interest rates are rising, which of the following fixed income securities offers the greatest protection from "interest rate risk"?
A. Zero coupon bonds with long maturities B. Low coupon bonds with long maturities C. Current coupon bonds with long maturities D. High coupon bonds with long maturities |
The best answer is D. The basic truths regarding bond price volatility and interest rate movements are: The longer the maturity, the greater the bond's price volatility in response to interest rate movements; and The lower the coupon rate, the greater the bond's price volatility in response to interest rate movements.
Based on these truths, the most volatile bonds will be those with long maturities and low coupon rates. (By the way, these will be the bonds trading at the largest discounts.) This question only examines the second factor, since the maturities are equivalent for all choices. The bond with the lowest price volatility will be the one with the highest coupon rate. Bonds with low coupon rates exhibit greater price volatility. Thus, to minimize price volatility due to interest rate movements ("interest rate risk"), high coupon bonds are appropriate. |
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The obligor on a municipal bond issue is the: B. lender of the bond proceeds |
The best answer is A. The "obligor" on a bond issue is the party having the obligation to pay the debt service on the bonds. This is the "legal" name for the borrower or debtor. |
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The essential difference between an open end fund and closed end fund is that a(n):
A. open-end fund is managed; while a closed-end fund is not managed B. closed-end fund is managed; while an open-end fund is not managed C. open-end fund has a different capital structure than a closed-end fund D. open-end fund computes Net Asset Value daily; while a closed-end fund does not |
The best answer is C. Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange or NASDAQ where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both open-end and closed-end funds compute Net Asset Value per share daily.
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An underwriting agreement where the syndicate members are not liable for any unsold securities is a(n):
A. firm commitment underwriting B. unmanaged underwriting C. stand-by underwriting D. all or none underwriting |
The best answer is D.
In a firm commitment underwriting, the underwriter buys the issue outright from the issuer, with the intention of reselling the issue to the public at a profit. Thus, the underwriter is a principal in the transaction, and is taking full financial liability. In a best efforts underwriting, the underwriter acts as agent, promising to use his best efforts to sell the issue, but takes no financial liability. In a best efforts - all or none underwriting, the underwriter acts as agent, using his best efforts to sell the issue, but takes no financial liability. However, if the entire amount is not sold, then the offering is canceled. In a stand-by underwriting, the underwriter agrees to purchase any unsubscribed shares in a new issue rights offering on a firm commitment basis. All underwritings that use broker-dealers to distribute the securities are "managed" offerings - they are managed by the syndicate manager. |
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The spread on a competitive bid municipal bond offering is the difference between the:
A. lowest and highest bids B. bid and "production" C. bid and the "cover" D. lowest and highest reoffering yields |
The best answer is B. The spread on a competitive bid municipal bond offering is the difference between the bid amount and the expected amount that the issue will sell for when it is reoffered (the "production"). The "cover" is the difference between the winning bid and the next highest bid.
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All of the following statements are true about Treasury Receipts EXCEPT:
A. Treasury Receipts are U.S. Government bonds stripped of coupons B. Tax on interest earned is deferred until maturity C. Interest and principal are paid at maturity D. Tax on interest earned is due annually |
The best answer is B. Treasury Receipts are U.S. Government bonds which have been stripped of coupons. The discount must be accreted annually, and the accretion amount is taxable as interest earned for that year. However, no monies are received from the issuer until maturity, when the security is redeemed at par. At this point, the owner receives the face amount but has no tax consequences (since the discount was taxed over the life of the bond).
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A customer sells 1 XYZ July 60 Call @ $4 after having purchased 100 shares of XYZ @ $55 per share.
If the customer is exercised, the tax consequences are: I cost basis of $55 per share II cost basis of $59 per share III sale proceeds of $60 per share IV sale proceeds of $64 per share A. I and III B. I and IV C. II and III D. II and IV |
The best answer is B. The customer purchased the stock at $55 for a cost basis of $55 for tax purposes. When the call is exercised, the customer must sell the stock at the strike price of $60. Since the customer also received $4 in premiums from the sale of the call, this is included in the sale proceeds for tax purposes. The sale proceeds are thus $60 + $4 = $64 per share. The net taxable gain is: Cost Basis of $55 - Sale Proceeds of $64 = Taxable Gain of $9 per share.
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A customer buys 1 ABC Jan 60 LEAP Call @ $8 that has 24 months left until expiration in a margin account. Regulation T requires that the customer deposit:
A. $400 B. $600 C. $800 D. $6,000 |
The best answer is B. Regulation T sets the initial margin requirement to buy LEAP options with over 9 months to expiration at 75% of the purchase amount. 75% of $800 = $600 margin requirement.
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In determining whether there has been a violation of position limits, long calls will be aggregated with:
I Long Puts II Short Calls III Short Puts A. I only B. II only C. III only D. I, II, III |
The best answer is C. Long calls and short puts constitute the "up" side of the market. Long puts and short calls constitute the "down" side of the market. Position limits are applied to each "side" of the market.
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Which of the following customer actions would NOT be an indicator of potential money laundering?
A. Deposits of bearer bonds to a margin account followed by immediate withdrawals of funds B. Extensive wire activity with accounts in countries with stringent bank secrecy laws C. Frequent deposits or withdrawals of cash in amounts just under $10,000 D. Frequent trades of securities of issuers headquartered outside the United States |
The best answer is D. Money laundering is typically characterized by extensive deposits or withdrawals of cash, money orders, traveler's checks, bearer bonds. and wire transfers - especially to overseas accounts in countries with tight bank secrecy laws. Frequent trading of securities of issuers headquartered outside the United States sounds just fine to us!
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Under FINRA rules, the best available market for a Pink Sheet issue is found:
A. on NASDAQ Level I B. by obtaining quotes from at least 3 market makers C. on the Consolidated Quotations Service D. by averaging the quotes found in the Pink Sheets |
The best answer is B. Under FINRA rules, to find the best available market for an OTC equity issue (either OTCBB or Pink Sheet), an over-the-counter trader must obtain at least 3 current quotes. Pink Sheet issues are not quoted on NASDAQ or CQS (NYSE and NYSE-MKT (AMEX) listed stock quotes).
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Which statements are TRUE regarding dividend and capital gain distributions made by mutual funds that have been reinvested in additional fund shares?
I The dividend distribution is taxable II The dividend distribution is tax deferred III The capital gain distribution is taxable IV The capital gain distribution is tax deferred A. I and III B. I and IV C. II and III D. II and IV |
The best answer is A. Mutual fund capital gains and dividend distributions are taxable to the shareholder in the year they are distributed by the fund, whether or not the distributions are automatically reinvested in new fund shares.
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All of the following are defined as "portfolio income" under IRS guidelines EXCEPT:
A. dividends received from common stock holdings B. interest income received from bond holdings C. proceeds from the sale of securities in excess of the tax basis of those securities D. royalties received from oil and gas limited partnership holdings |
The best answer is D. Income from partnership interests is defined as "passive income" under IRS rules. Royalties from oil and gas limited partnerships are thus "passive income." Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.
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If a municipality's financial advisor wishes to act as underwriter of that issue in a negotiated offering, which statement is TRUE?
A. The underwriter must use 2 independent municipal firms to establish the offering price B. The underwriter must disclose to the issuer in writing all anticipated remuneration to be received from the issuer C. The issuer must be informed in writing of the potential conflict of interest D. The financial advisor is prohibited from acting as the underwriter in the bond offering |
The best answer is D. A financial advisor to a municipality receives an advisory fee for helping a municipality structure a new bond issue, with the goal of getting the lowest interest cost for the issuer. An underwriter for a new municipal issue wants to get the highest interest rates possible on the bonds, because it makes them easier to sell. Thus, there is an inherent conflict of interest between the two. The MSRB rule on this is simple - the financial advisor cannot be the underwriter. It makes no difference if the underwriting is competitive bid or negotiated.
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All of the following statements are true about REITs EXCEPT: C. REITs are listed and trade on stock exchanges |
The best answer is B. REIT shares are not redeemable; they are negotiable and trade on exchanges. REITs are similar to closed end investment companies and must invest at least 75% of their assets in real estate activities to qualify as a "regulated" investment company under Subchapter M of the Internal Revenue Code.
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If a distribution from a Coverdell Education Savings Account in a given year exceeds the beneficiary's qualified education expenses in that year, the:
A. excess distribution is not taxable B. excess distribution is taxable and a 10% penalty is imposed C. entire distribution is not taxable D. entire distribution is taxable and a 10% penalty tax is imposed |
The best answer is B. Since contributions to Coverdell Education Savings Account are not deductible, normally, distributions from a Coverdell Education Savings Account to pay for qualified education expenses are not taxable. However, if distributions are taken in a given year in excess of the qualified education expenses incurred in that year, then the excess portion is taxable - with the taxable amount being the portion of the distribution that represents the "build-up" in the account above the original contribution amount. This "build-up" was never taxed. In addition, since this is, most likely, a premature distribution, the 10% penalty tax applies as well. The moral of this tale is, use the money in the account to pay for qualified education expenses only; and use it all up for this purpose!
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Municipal bond traders execute transactions in all of the following ways EXCEPT:
A. on the floor of recognized exchanges B. with bank dealers in the over-the-counter market C. with brokerage wire houses in the over-the-counter market D. with municipal broker's brokers |
The best answer is A. Municipal bonds are traded in the over-the-counter market - with bank dealers, other brokers, as well as with municipal broker's brokers. They are not traded on national stock exchanges.
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A customer requests the preliminary prospectus for a new issue that a firm is underwriting. The registered representative "highlights" important information in the document with a red marking pen. This action is:
A. permitted with written approval of the branch manager B. permitted if the registered representative sends the customer a letter acknowledging the alterations C. permitted if the altered document is filed with the SEC D. not allowed under any circumstances |
The best answer is D. Alterations to a preliminary prospectus or final prospectus are prohibited. These documents have been filed with the SEC; and it is expected that the public will receive them in the exact form as filed with the SEC. Any changes to the documents invalidate the filing.
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