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899 Cards in this Set

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To determine the equity in a combined margin account
long market value (LMV) + the credit balance (CR), - the debit balance (DR) - the short market value (SMV).
NYSE Composite Index is composed of
only common stocks
The bond has been called at 103
. = 1030
Most brokerage firms do not charge for the collection of dividends, holding of securities, and other services, but if they do charge
the amount must be reasonably fair and not discriminate between customers.
SIPC does not insure
If a stock is held short-term (one year or less) and a put is purchased
holding period is terminated
The settlement date on a transaction
is three business days following the trade date.
Regulation T requires payment by customers for purchases in
two business days following the settlement date
According to Regulation T, when purchasing an option contract the transaction must be paid for within
5 days
According to Regulation T, securities must be paid for
within 2 business days of the standard (regular-way) settlement date
SRO require settlement between the buying and selling brokers in
three business days from the trade date.
Regulation NMS prohibits a trade-through of
a protected quote. A protected quote is the highest bid and lowest offer (the inside market)
Moodys Short Term Ratins
P1, 2, 3,, NP
The yield disclosed is the lower of the
yield to maturity or yield to call. In other words, the yield to worst.
A bear spread always involves
buying the higher exercise price and selling the lower exercise price.
A bull spread always involves buying
the lower exercise price and selling the higher exercise price
A narrow-based index gives a measurement of stocks in
a particular industry or sector of the economy.
A broad-based index option would be used to hedge
a diversified stock portfolio.
The primary benefit of a 1035 exchange is that
it is not taxable. However, the new annuity may come with new restrictions making it unsuitable for the investor.
Call options are issued by the
Options Clearing Corporation (OCC) and not by an issuer of securities.
The SEC or FINRA enforce rules for broker-dealers
Comptroller of the currency enforces rules for
federal banks
The FRB enforces rules for
state banks that are members of the FRB
The FDIC enforces rules for
member banks of the FDIC
Any broker-dealer or registered representative selling securities in a particular state
must be registered in that state - Firm being registered doesnt matter
The Wilshire Associates Equity Index shows the market value in dollars of
7,000 NYSE, NYSE MKT (formally NYSE Amex), and Nasdaq stocks. It contains the most stocks of the choices listed.
There is no prohibition restricting an RR to contact
an investment banker at the firm.
municipal bond offers the best tax advantage because
the interest income is completely free from U.S. government taxes
28% tax rate. The taxable equivalent yield of the 5% municipal bond is
6.9% (5% municipal yield divided by 72% (100-28)
The earnings on an IRA account grow
If an investor maintains an IRA account that has pretax and after-tax contributions and makes withdrawals,
the IRS considers withdrawals to come from both sources.
investor sells a portion of his holdings, unless specfied, the IRS will assume that
first-in, first-out (FIFO) will be the method to be used.
Regular-way settlement for stock transactions is
in three business days.
In most cases, settlement occurs electronically through DTCC, NON DTCC
settlement takes place at the buyer's premises.
The bond paying interest annually will have a yield to maturity that is
less than the bond paying interest semiannually.
Yields to maturity assume
a reinvestment and compounding of interest.
The compounding of interest will be greater for the bond
paying semiannual interest.
only VRDOs have
a put feature that permits the holder to sell the securities back to the issuer or third party.
In periods of easy money, there is availability of money. Therefore,
interest rates will decline or be lower.
In periods of easy money, bonds of similar quality generally will have
short-term yields lower than long-term yields.
Both short-term and long-term yields will be
below normal.
This situation creates a
positively sloped yield curve where yields rise from short to long term.
easy money when interest rates are declining,
yields on shorter maturities would be less than those on longer maturities
A saucer is a chart pattern indicates that a stock
has formed a bottom in its trading cycle and is ready to rise.
Stagflation is a prolonged period of a
high rate of inflation together with a high rate of unemployment
high unemployment usually leads to a period of
low inflation or even deflation (falling prices) and the possibility of a recession.
A period of low unemployment usually leads to
rising prices and increased inflation.
A deflationary period is characterized by a
sluggish economy where goods and services decline in value.
Interest rates tend to trend
downward, causing bond prices to rise
ETNs do not usually pay
an annual coupon or specified dividend. They are a type of unsecured debt security.
When interest rates are rising, industrial corporations that market big-ticket items as well as utilities that are heavy borrowers will be
adversely affected
A shelf registration under Rule 415
provides liquidity and fast re-sale (avoid full registration)
GTC orders below the current market on the designated market maker's (DMM) book (buy limit, sell stop, and sell stop-limit orders) will be
reduced by the amount of the dividend when the stock sells ex-dividend.
Municipal bond insurance guarantees
the timely payment of principal and interest.
If a municipal bond has 10 years to maturity, the insurance company is obligated to make
20 interest payments as they come due and a lump sum at maturity.
profit is treated as a capital gain in
the year the transaction is closed out.
In August, an investor sells an uncovered listed option and receives a $1,100 premium. The following February, the customer makes a closing purchase transaction at 3. The result of the transaction is
$800 Capital Gain
Time value is calculated by
taking the difference between an option's premium and its intrinsic value.
Intrinsic value in options is
the in-the-money portion of the option's premium (Calls=Market Price-Strike Price) (Puts=Stikes-Market)
If ABC stock is currently trading at 35.25 and the October 35 put option has a premium of 2.25, what is the time value of this option?
Since the market price of the stock is greater than the strike price of the put option, this option is out-of-the money and has no intrinsic value. The entire premium of this option, $225, is considered the time value.
Reverse convertible securities are short-term notes issued by banks and broker-dealers that
usually pay a coupon rate above prevailing market rates.
An investor purchasing a reverse convertible security is
seeking an above-market coupon rate - high income
The issuer agrees to pay this higher coupon rate since it has an option to
sell a security to the investor if the price of the security falls below a specified value known as the knock-in level.
If the price of the underlying asset stays above the knock-in level, the investor will receive
the high coupon and the full return of her principal (the most beneficial option)
A corporation purchases new machinery using cash
Working capital is reduced, Total assets remain the same
When purchasing machinery with cash, current assets (cash) are
reduced and fixed assets (machinery) are increased by the same amount.
total assets do not change.
Since total assets (TA) and total liabilities (TL) remain the same, stockholders' equity (TA - TL) does not change.
Working capital (current assets minus current liabilities)
is reduced since current assets are reduced.
Withdrawals in traditional IRAs must begin by age
70 1/2
investor expects interest rates (yields) to decline, she is anticipating
rising bond prices.
The bonds that will rise (fluctuate) the most are
long-term, discount bonds.
Treasury stock is
previously outstanding stock that has been repurchased by a corporation.
If the performance of the separate account of a variable life insurance policy is less than the assumed interest rate (AIR), the death benefit will
the death benefit can never
drop below the face value of the policy.
The cash value may also decline. However, there is
no guaranteed minimum.
desirable arbitrage situation
stock is at a premium to parity and the bond is trading at par
Treasury arbitrage restrictions, that prevent state and local governments from
misusing the tax exemption.
Treasury arbitrage restrictions generally prohibit issuers of municipal securities from
Investing bond proceeds in higher-yielding Treasury securities
economic theory stating that government intervention in the marketplace is necessary for controlling economic growth
Keynesian theory
Recapture is a situation where
tax benefits previously taken should be paid back to the government
Overlapping debt involves only
general obligation borrowing - A park district, A library district, A school district
A turnpike authority would typically issue only
revenue bonds
Volume and holding-period restrictions do NOT apply to the resale of private placements when
The purchaser is a qualified institutional buyer
Rule 144A of the Securities Act of 1933, the owner of securities obtained through a Private Placement may resell those securities to a
qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144.
Qualified institutional buyers must have
at least $100 million dollars of investable assets.
The 30-Day Visible Supply is
all municipal bonds that are expected to be brought to market in the next 30 days.
The 30-Day Visible Supply is computed daily and includes
all competitive and negotiated offerings that are anticipated to be brought to market. does not include short-term notes or auction rate securities
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
A mutual fund investor most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase
an income fund
are needed to open a new discretionary account
A new account form, a basic customer margin agreement, and a power of attorney
The Johnsons want to purchase life insurance that will provide the potential for appreciation of future benefits, but are uncertain how much to purchase due to the unpredictable nature of Alan's income.
called variable universal life or flexible premium variable life, is most appropriate.
Universal life insurance will allow the customer to
vary their premiums based on current income levels and insurance requirements,
while variable life insurance will provide
returns based on the performance of a separate account.
The equity in a long margin account equals
market value minus the debit balance.
SMA does
not enter into the calculation of equity.
TANs and BANs are
short-term municipal notes and, if their maturities extend four months, these securities can easily be sold in the secondary market.
An auction rate security (ARS) does not have a Put feature and, if the auction fails,
the investor may not have immediate access to his funds
The 5% Markup Policy applies to
Securities quoted on Nasdaq
a not-held order allows a floor broker to
use discretion in executing an order
DMMs can not accept a
Not Held Order
The Interbank market is an
unregulated over-the-counter market in which currencies of different countries are bought and sold.
Foreign currency transactions may settle
on a spot or forward basis.
Spot transactions settle in
two business days from the trade date.
In a forward transaction, the exchange rate is
established on the trade date but settlement occurs in more than two business days.
high put/call ratio
Bullish Indicator
low put/call ratio
Bearish Indiactor
Technical analysts view the put/call ratio as a
contrarian indicator. The higher the ratio, the more oversold the market, and the higher the probability that the market will reverse course
When the wash sale rule is activated, the investor must
add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost.
On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is
$30 (27 + 3 point Wash Sale Rules Loss)
A defined benefit plan is designed to provide employees with a
fixed monthly stipend at retirement. generally a percentage of the employee's salary, the exact amount of which is determined by the employee's age and years of service.
Who may not trade on the floor of the NYSE
An institutional block trader. may forward orders to the NYSE trading floor from the brokerage firm's trading desk but is not physically located and trading on the floor of the NYSE
The required equity for a short sale where the stock is less than $5 per share is
the greater of $2.50 per share or 100% of the market value.
An investor selling 1,000 shares of JonCo stock short at 3.5 must deposit
$3,500 because the market value (1,000 shares x $3.50) is greater than $2.50 per share (1,000 shares x $2.50).
sales tax is
regressive tax, affects low income individuals the most
A regressive tax applies the
same tax rate regardless of a person's income. This has an adverse effect on a low-income person since the tax represents a higher percentage of income.
Fiscal policy is enacted by
Congress. Fiscal policy is the use of the government's power to tax and spend
A customer without a discretionary account gives a registered representative the following verbal instructions: Buy 1,000 shares of General Electric whenever you think the price is right. Under current regulations:
The order may be executed by the RR only on the same trading day
The customer indicated to the registered representative the name of the specific stock (GE), the action (to buy), and the amount (1,000 shares), so this is
a not-held order.
Allowing the RR to make decisions limited to
price and time does not constitute discretion.
Absent written instructions from the client, this type of time and price discretion is
only valid the same trading day.
The Federal Farm Credit Banks issue consolidated systemwide notes that are
issued at a discount (as with T-bills) and are non-interest-bearing.
By buying a put option, an investor
Can avoid selling a security for a large capital gain and yet participate in additional gains if the security continues to increase in price, be assured of selling the security at the strike price during the term of the option, an protect a profit on his current stock position
Before accepting a DVP (delivery versus payment) or RVP (receipt versus payment) order from a customer, a broker-dealer must receive
the name of the customer's agent and the customer's account number
In a divided account (Western account), the member is
responsible for its own participation in the syndicate. If any bonds remain unsold, it is the responsibility of that member.
In an undivided or Eastern account, any unsold bonds are
the responsibility of the entire syndicate. Each member would then be liable for the same proportion as his original participation.
Commercial paper has a maximum maturity of 270 days in order to
be exempt from the registration requirements of the Securities Act of 1933.
Most commercial paper is purchased by
institutional investors.
The margin requirement when purchasing options
is 100% of the purchase price (premium).
Since the purchase price of the options is $2,000, Mr. Blue may use the $1,000 SMA and will be required to deposit an additional $1,000. The SMA is found
by subtracting the required equity, $10,000 ($20,000 x 50%) from the current equity in the account ($11,000).
If the customer is short RST calls, he anticipates
that the market price of RST stock will decline.
Since he is bearish on the stock, he could also be
long puts on RST. This is considered on the same side of the market.
The prices of preferred stocks are
inversely related to the movement of interest rates, as are bonds
Therefore, if the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge.
Yield-based calls (which are yield-based options) increase in value when interest rates rise, also creating a viable hedge.
Yield-based options are
cash-settled options based on the movement in yield on a particular Treasury security.
If an investor expects yields (interest rates) to rise, he will
buy calls or sell puts
A corporation's shareholders must vote for
Stock splits
The Federal Reserve Board does
not issue securities, but will purchase and sell securities to influence U.S. monetary policy
A standby underwriting is associated with
a rights offering of common stock.
Fill-or-kill is a type of
order placed to buy or sell a security in the secondary market.
Treasury bills and bankers' acceptances are typically sold
at a discount
An underwriter can stabilize a new issue
at or below the offering price
The project feasibility and financial statements are found in a municipality's
official statement
The amount of good faith deposit and expenses to be borne by the purchaser or issuer would be found in a
notice of sale.
a company that becomes delisted from the NYSE or Nasdaq
may be quoted (not listed) on the OTC Bulletin Board or in the OTC Pink Market, quotes generally are firm.
Firm quotes obligate the offering dealer to
buy or sell the amount quoted
When a cash dividend is paid, it reduces the
debit balance
sales charge is always expressed as a percentage of the
offering price
sales charge of the a Fund (5.25 Bid 5.5 Offer) is
4.5% - difference between the bid price of $5.25 and the offer price of $5.50, equals $.25 ($5.50 - $5.25 = $.25) - then divide the DIfference .25/5.50 to get the Sales Charge of 4.5%
A client sells short 1,000 shares of KPL at $46 a share. Fourteen months later the client covers the short and on the same day delivers the stock to close out the short position at $35 a share. For tax purposes, the client will report:
A short-term capital gain - The customer closed out the short position the same day, so the holding period was less than one day -
The gain or loss on a short sale is typically treated as a
short-term capital gain or loss, since a holding period for the security is not established
Financial service companies (banks, broker-dealers, and insurance companies) are usually highly leveraged (a high percentage of capital is borrowed) and are, therefore, most affected by
interest-rate swings
`ex-dividend date is
two business days preceding the record date
Interest on an adjustment (income) bond needs to be paid
only if the corporation has sufficient income
regular-way transaction
three-business-day regular-way settlement date (DO NOT COUNT HOLIDAYS)
According to the rules of the options exchanges, when a customer refuses to provide Financial Information, the brokerage firm must record the customer's refusal on its records, and
must use whatever information it can obtain on its own in determining whether it should accept the account for options trading
Common Stock Shareholders have the right to vote for the board of directors, but not
to appoint officers of the corporation
A written disclosure must be made to the customer regarding a control relationship
at or prior to the settlement date
Customers must be informed about the existence of a control relationship regardless of the type of account or type of transaction
prior to the trade
The price/earnings ratio is found by
dividing the current market price by the earnings per share
RSR Corporation has earned $4 per share and has paid a 75 cent dividend per share. If the stock is selling at $38 a share, what is its price/earnings ratio
9.5 ($38 / $4)
a broker-dealer or RR buys or sells stock or options before the public release of proprietary information concerning a large block order, it is considered
a business development company (BDC)
invests in private small and medium-size companies
An RR should not take action, for a client showing signs of dementia without
informing the client first
A nondilutive feature requires that the conversion features be adjusted should there be a stock split or stock dividend.
The conversion ratio will be increased and the conversion price will be reduced
A 7% convertible bond has a conversion ratio of 40. The bond has a nondilutive feature and the common is selling at $43 a share. If the company distributes a 10% stock dividend
he new conversion ratio will be 44 [the old ratio (40) plus the old ratio times the percentage dividend (40 x 10% = 4)]. The new conversion price will be the par value of the bond divided by the new conversion ratio ($1,000 divided by 44 equals $22.73)
subordinated debenture holders are paid after everyone
except preferred and common stockholders
RELP (A direct participation program in real estate does) does not pay
cash dividends
The interest on a revenue bond is usually paid
from the earnings of the facility for which the bonds were issued
revenue bonds are considered
riskier, than GO Bonds
interest rates increased, tight monetary policy, the yield curve inverted, causing
short-term rates to be higher
interest rates decrease, easy money policy, normal yield curve, causing
long term rates to be higher
equity in a margin account formula
long market value plus the credit balance minus the short market value minus the debit balance
Any entity is permitted to write call options except
the corporation itself
The margin requirement for a short sale of stock
is 50%
An investor sold 100 shares of STC short at $40 per share and wrote an STC Oct 40 put at 4. How much cash did the investor need to deposit?
$1,600 (2000-400) (200 is half of the 4k requirement for short sale)
REITs are regulated as
securities under the Securities Act of 1933.
An investor purchasing a REIT in the primary market must receive a.
is needed to open a margin account and gives the brokerage firm the right to pledge customer securities to a bank as collateral for a loan
hypothecation agreement
The transfer of bonds from one party to another may be accomplished by an endorsement on the back of the bond certificate or through a
Bond power
Municipal notes are used mostly for
interim (temporary) financing
A customer can meet the a call Margin by either depositing in his account
cash equal to the amount of the call or marginable stock with a LOAN VALUE equal to the dollar amount of the call
Regardless of when a person files a tax return, the IRA contribution must be made no later than
April 15 of the FOLLOWING year
In a margin account, the customer's equity is insured up to the
$500,000 maximum
SIPC provides maximum protection of
$500,000 for each customer (for each different account title)
Unit investment trusts are not usually issued at a
discount. They are issued at par and mature at par
Advertising must be approved
prior to first use by a municipal securities principal
dealer-prepared summary or abstract of the official statement is considered
Zero-coupon bonds are issued at a discount and do not pay semiannual interest. Therefore, there are no interest payments to reinvest, eliminating
reinvestment risk
An investor may transfer funds from one retirement account to an IRA or other retirement account
without incurring taxes or penalties
According to SIPC, if a client has a margin account, the net equity is
covered (the long market value minus the debit balance).
A client is also permitted (but not required) to
pay off the debit balance and receive the full value of the securities
an RR using Facebook to permit real-time communication is considered
public appearance
correspondence is any written or electronic communication distributed or made available to
25 or fewer retail investors.
The performance of a variable annuity is related to the
performance of the separate account
The holder of a call will get a dividend only if the option is exercised
prior to the ex-dividend date
On the day prior to the ex-dividend date for an ordinary cash dividend, a holder of a call tenders an exercise notice. The investor will be:
Entitled to the dividend
An individual considering the purchase of an equity-indexed annuity should understand that
The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum
Equity indexed annuities (EIAs) are a hybrid product that combines
the elements of fixed and variable annuities
EIAs provide a guaranteed minimum rate of return, but their performance is
linked to a securities stock market index
CDs sold by registered representatives are insured from bankrupcy by
FDIC for Issuer, SIPIC for B/D
WRAP accounts charge
one overall fee (1-3%)
A WRAP account is usually managed by an
investment adviser.
A brokerage firm erroneously confirms to a customer a purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually made at 28.75. The customer
Must pay 28.75
In a variable universal life policy, the performance of the separate account could
increase or decrease the cash value.
Loans against the variable universal life policy will
reduce the cash value available.
The redemption of bonds will not affect
dividends paid to stockholders
ETNs carry issuer risk that is tied to the
creditworthiness of the financial institution backing the note
All bonds, regardless of the issuer's location, are subject to
interest-rate risk
declares that a municipality may legally issue bonds
The issuer's bond counsel
order of priority investors rank if a company declares bankruptcy
(1) secured bondholders, (2) unsecured bondholders, (3) preferred shareholders, and (4) common shareholders.
Municipal bonds purchased at a Premium are
Amortized based on a constant yield method.
Municipal bonds purchased at a Discount are
Accreted, on a constant yield method, uses the bond's yield to maturity
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
Municipal bearer bonds that are in default of interest, trade
With unpaid coupons attached
An at-the-opening order is an order placed for execution at the
opening price of the day. If it is not executed, it will be cancelled
MSRB rules state that subject or nominal quotes may be given for
Informational purposes
Individuals generally purchase preferred stock for
Cumulative preferred stock will add all unpaid dividends to a future payment if
a cash dividend is to be paid to common shareholders
Participating preferred stock allows the owners to
share in the extraordinary earnings of a company.
An inverse ETN would pay
the opposite of the benchmark that is being tracked, suitable for short-term trading
If a municipal bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at
discount - yield to maturity (6.35%) is greater than the nominal yield (6.15%) - / (curve)
alpha is often considered to represent the value that
a portfolio manager adds or subtracts from a fund portfolio's return.
beta is a measure of the
volatility of a security or a portfolio in comparison to the market as a whole
To find the dividend payout ratio $5/sh common stock, $2 common stock div, divide the yearly dividend on
the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%.
ABC Corporation has net income of $10,000,000 and 5,000,000 common shares outstanding. ABC Corporation pays out $1,000,000 in dividends annually. ABC Corporation's dividend payout ratio is
The EPS is $2.00 ($10,000,000 divided by 5,000,000 shares). ABC pays a $0.20 dividend per share ($1,000,0000 dividends divided by 5,000,000 shares). The $0.20 dividend divided by the $2.00 EPS equals a 10% dividend payout ratio
A writer or seller of an uncovered call option does
not own the underlying stock
Federal funds are
excess reserves loaned by commercial banks to other commercial banks and are a leading money-market indicator
federal funds rate fluctuates daily, making it the
most volatile money-market (short-term) rate
a decline in Real GDP for two consecutive quarters indicates a
Real GDP is the Gross Domestic Product adjusted for.
Economic indicators are classified as
leading, coincident, or lagging.
Leading indicators
precede the change in the economy as a whole.
Coincident indicators change
with the economy as a whole,
lagging indicators change
After the economy as a whole.
New orders for consumer goods and materials (also referred to as new orders for durable goods) are a leading
economic indicator
industrial production is a
coincident indicator
The average prime rate charged by banks and the average duration of unemployment are l
lagging indicators
An investor buys an 8% municipal bond in the secondary market at a 10.00 basis. If the bond is held to maturity, the investor's after-tax return will be:
Between 8% and 10% - Since the yield (10%) is higher than the coupon (8%), the bond was purchased at a discount
MSRB rules relate to quotes that are communicated or published in
any manner - can be verbal or written, dont have to be one or other or both
A derivative is a financial product that derives its value from movements in
another financial product - options, Collateralized mortgage obligations
The amount of new issues sold, compared to those offered for sale, as of the close of business each Friday is reported in the The Bond Buyer's
Placement ratio
when yields in the market increase, the market price of outstanding bonds
A customer bought an 8% debenture at a 7.20 basis. If the bonds are currently trading 15 basis points higher
The bond's market price has decreased
FNMA(Federal National Mortgage Association) bonds are
not guaranteed by the U.S. government.
Wireless Communications is offering 2,000,000 common shares (par value $.10) at $15, the financial impact on the company
An increase in paid-in capital, A reduction in the long-term debt ratio
Immediate family members include a
spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm
A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase
The IPO from a different broker-dealer
A customer is considered a pattern day trader if
4 or more day trades are executed over any 5-business-day period.
The minimum equity required for a pattern day trader
is $25,000
A company in France will be importing California wines. The company must pay in U.S. dollars and is, therefore, concerned that the U.S. dollar will appreciate in value. To provide protection in the event that the U.S. dollar does appreciate, the company could buy
Euro puts - there are no US Dollar Options
Industrial development revenue bonds are secured by a lease agreement with a corporation and are only as secure
as the corporation
Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for
customer order flow
If a rollover is done within 60 days, it will be
Under Rule 144, the amount that may be sold during any 90-day period is
1% of the outstanding shares or the average weekly volume of trading for the four weeks prior to the sale, whichever is greater
On a standby underwriting, the underwriting syndicate agrees to
purchase any shares that the corporation does not sell
Debt issued between two states is
not considered overlapping debt
company is refunding bonds at 106.75% of its par value. bondholders who own the 6 1/4% bonds will receive
106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest
An apprentice may function as a representative in all activities except
contact with the public and being compensated on the basis of transactions (i.e., receiving commissions)
The apprentice may execute transactions with other firms, but
not with customers, even institutional customers.
Brokerage firms are required to send customer statements
quarterly for no activity, monthly for active
municipal bonds issued in a serial maturity on a
yield basis - trader may quote a serial bond at a basis price of 5.35, which means a yield to maturity of 5.35%
Term bonds are normally quoted using
the dollar pricing (percentage of par), dollar bonds - term bond would be quoted at a price of 98, which means that the bond is quoted at 98% of par value, or $980 ($1,000 par x 98%)
Serial bonds mature in
successive years and are priced on a yield-to-maturity basis. par).
As a serial issue nears its final maturity, the outstanding principal and total interest payments
Term bonds mature at
one date in the future and are priced at a dollar price (percentage of par)
Serial bonds have different maturity dates with lesser amounts of debt outstanding as time goes by. The bonds have declining interest payments and principal amounts.
Term bonds, by comparison, mature at the same time and have stable interest payments with the principal paid on one maturity date
If a stock index option is exercised against the writer, the writer is obligated to deliver
the cash difference between the exercise price and the index value as of the close of trading on that day if the option is in-the-money.
The exercise of a stock index option is settled by
cash - instead of the delivery of securities.
An index will not be affected if
one of its components should split.
index options are both
American style (may be exercised any day up to expiration) and European style (may only be exercised on the last trading day prior to expiration).
Stock index options have a
monthly expiration cycle
Under the UTMA, when the minor reaches the age of majority as determined by the state, the custodian
must transfer the account to the owner's individual name.
The state in which the minor is a resident
determines when a minor takes control of the account
The marketability of a municipal bond would NOT be affected by the
Dated date
The dated date of a municipal bond is the
date that interest begins to accrue and will not affect its marketability
A registered investment adviser is a type of institutional customer, and any communication directed only to institutional customers does
not need to be filed with FINRA
Federal funds are short-term funds (usually overnight) that
one bank lends to another to correct a deficit reserve position.
Federal funds are
not traded in the secondary market since they are not securities
An investor purchased stock at $40/share that currently has a market price of $60/share. The investor thinks that the long-term prospects for the stock are attractive, but that the price will decline temporarily. The customer could take advantage of the temporary decline, by
Selling a call
A firm may use electronic communications to verify account eligibility for new issues, but may not
rely on oral statements
The PSA Model is used when pricing
Collateralized mortgage obligations - standard model for estimating the prepayment rate for mortgage-backed securities including CMOs
A revenue bond and a special tax bond are both considered
debt obligations of a municipal government
A special tax bond is a type of
revenue bond, backed only by a specific tax source, such as an excise tax
An investor expects the market price of a security to fluctuate widely over a short period. The investor will most likely
Buy a straddle
If the market moved up sharply the
call could be exercised and
if the market moved down sharply the
put could be exercised, resulting in a profit
Wide you
Buy a Spread - Call Bull, Put Bear
Narrow you
Sell a Spread - Call Bear, Put Bull
According to FINRA Rule 2330, suitability requirements for recommendations concerning the purchase of variable annuities apply to
New purchases, Exchanges, Initial subaccount allocations
In a credit spread, the investor will profit if the spread (difference in premium)
An investor purchases an EPG Jan 40 put at 5 and writes an EPG Jan 50 put at 13. The investor would profit in all of the following situations, EXCEPT
The spread widens
the expiration date for standardized option contracts, including European-style options, is the
third Friday of the expiration month
Growth stocks have
high price-earnings ratios and low dividend payout ratios
A short-swing profit is a profit made on stock held by insiders for
less than six months
On May 25, the president of MaxCo bought 3,000 shares of MaxCo stock in the open market at $33. Two months later, the stock has increased to $40. If the president now wants to sell the shares
The profit from the trade must be forfeited according to the short-swing profit rule
A writer of a put option is covered if he is long
another put on the same underlying stock, with an equal or greater exercise price, having the same or later expiration date
According to industry regulations, a writer of an ABC March 50 put is considered covered for margin purposes if the writer is long an ABC
March 60 put
A minor may not
endorse a stock certificate
Private label mortgage-backed securities are issued by
Financial institutions
A private label MBS is not
an obligation of the U.S. government or any GSE and its credit rating is assigned by an independent credit agency.
A private label MBS has a
higher degree of credit risk and is generally not given a AAA rating.
A real estate investment trust (REIT) that owns properties (e.g., office buildings) and also makes loans to real estate developers is a
hybrid REIT
While GPs are not allowed to borrow from the partnership, they can
Lend Money
To apply for a securities registration, a person must file
Form U4 with FINRA
A business development company (BDC) raises capital by
selling securities to investors and is similar in structure to a closed-end investment company
The SRO minimum maintenance requirement for a stock sold short at $5 per share or above is
$5 per share or 30% of the market value, Whichever is Greater
Ms. Brown owns a variable annuity that has a life annuity payout option with a 20-year period certain. If Ms. Brown dies after 14 years of payments
Future payments will continue for 6 years to a named beneficiary
If the owner of a 20-year period certain annuity dies, the annuity company will
pay a named beneficiary for the time remaining on the 20-year period
When buying options,
100% of the purchase price (the premium) must be deposited
Electronic Communication Network (ECN)
accept only certain types of orders, such as limit orders - the system cannot match a buyer and seller, a client's order may have a limited ability to be executed
A registered representative may not purchase a
direct participation program in a discretionary account without prior written approval by the customer
The preferred stock is convertible into 1/2 share of common stock. The common stock is selling for 35.75. Parity (or equality in dollar value) for the preferred stock is
1/2 of 35.75 (17.88).
The dealer that gives a firm quote at Par is
required to do the trade at par
under the Uniform Transfers to Minors Act (UTMA)
The custodial relationship is terminated when the minor reaches majority
All stock in the UTMA account must be
registered in the name of the custodian as custodian for the minor
When investing in a DPP, the customer must verify that he meets all suitability standards. This can be accomplished by furnishing
documents such as past tax returns and a statement of net worth.
A broker-dealer may reject a delivery of municipal bonds if
The bonds are lacking a legal opinion
The ex-dividend date is the first day a stock trades
without a dividend and this date is typically two business days prior to the record date
A defensive stock is
not drastically affected by a downturn in the economy
companies involved in the necessary areas of life are considered
defensive (e.g., energy or utilities, tobacco, food, clothing, soft drink, and candy companies)
Construction, mining, steel, automobile, and heavy equipment manufacturing companies are
more affected by an economic downturn
There is no required minimum distribution (RMD) requirement for a
Roth IRA
Unlike a traditional IRA, contributions to a Roth IRA are not
tax-deductible, so the investor is contributing after-tax dollars.
The advantage of the Roth IRA is that all the money accumulated in the account may be withdrawn
tax-free after age 59 1/2 if the first contribution was made at least five years prior
a traditional IRA, penalty would be
50% of the RMD amount.
$470,000 IRA balance, 27.4 period of time, RMD requirment would be
$17,153 (the account balance divided by 27.4)
NOT taxable to the owner of mutual fund shares
Fund shares held by the investor, which have appreciated but have not yet been sold
cost basis using the average cost method,
divide the sum of all investments (including reinvested distributions) by the total number of shares owned by the investor
contributions to a Roth IRA are
According to SRO rules, the transfer of a customer account must be completed by the carrying party within
three business days of validation of the transfer instructions
The price/earnings ratio is found by dividing
the current Market Price by the Earnings Per Share
If the FRB(fed reserve board) increases the discount rate, the general level of interest
rates increases.
The member bank is charged the
discount rate when it borrows from the Fed
The prices of long-term bonds
decreases more in price than the price of short-term bonds
Due to their highly complex nature, CDOs are generally not suitable for
retail investors
A CDO (collateralized debt obligation) is a sophisticated financial instrument that begins with an individual loan (such as a mortgage or corporate debt).
These loans are placed in a pool, and investors then purchase a security (bond, tranche, slice) that represents an interest in that pool
CDOs are investment vehicles, broadly categorized as
asset-backed securities
An investor purchases a Canadian dollar September 80 call and writes a Canadian dollar September 82 call. This position is a
Bullish spread - A debit spread is created when the premium of the option purchased is greater than the premium of the option sold. The September 80 call, which is the right to buy the Canadian dollar at 80, is more valuable than an option that provides the right to buy at 82.
The immediate result of an FRB repo is
an increased money supply, which would have the effect of lowering interest rates
If the FRB engages in repurchase agreements
The money supply is being increased, The fed funds rate could decline
An individual purchases two BP (British pound) 150 calls @ 9.20, The contract size is 10,000 BP, The total cost for the contracts is
$1,840 - (10,000 x .0920 = 920 x 2 = 1,840)
The credit balance in a short margin account is determined by
adding the short sale proceeds and the Reg T deposit
A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is
$15,000 - the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%).
Auction dealers refer to bids by prospective holders as
buy orders
Auction dealers refer to bids by holders as
roll-at-rate orders.
Securities firms may charge customers for
all services they provide as long as the charge is fair and reasonable.
A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover her short position. The customer instructs her registered representative to cover the short position at the market on the close. The order will be executed at:
The closing price of the day
A high net worth investor seeking safety of principal would MOST likely invest in which of the following securities
High-grade general obligation bonds
High-grade generally refers to an
investment-grade or highly rated bond.
A general obligation bond would also offer a
high net worth investor tax-exempt income.
High-yield refers to
non-investment- grade or junk bonds that would expose the investor to the risk of not achieving safety of principal.
A customer owns a municipal bond that has been escrowed to maturity
The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds at maturity
open interest, referring to call option contracts, means
the number of contracts that have not been closed out through a sale or by expiration
A sinking fund is used by an issuer to set aside funds that will be used for the purpose of
redeeming a corporation's Bonds prior to or at maturity
SPOT prices determined by
SPOT trades on the
A municipal bond pays interest on February 1 and August 1. A customer purchasing the bond on Monday, April 30 will need to pay the seller the purchase price plus accrued interest for
92 days - Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Thursday, May 3
dark pool is trading
Between investors, allowing them to buy and sell securities Anonymously Without quotes being displayed
A capital appreciation bond (CAB) has a similar structure to
a zero-coupon bond.
CABs do
not pay periodic interest and are NOT suitable for investors who seek income.
In a municipal bond underwriting, the difference between what the issuer receives and the public offering price is the
bid limitations for a new municipal bond issue are found in the
notice of sale - information pertaining to the bidding would be contained in the notice of sale
transfer agent is responsible for
issuing new certificates, cancelling old certificates, keeping a record of shareholders and the number of shares each owns, and handling problems that come about in cases of missing, lost, stolen, or mutilated securities
The registrar
makes sure that outstanding shares do not exceed authorized shares
Options that are listed on exchanges are issued and guaranteed by
the Options Clearing Corporation
bid and offer prices of mutual funds
bid price is equal to the net asset value - offer price is equal to the net asset value plus the sales charge
Tax anticipation notes (TANs) are
interest-bearing securities and trade with accrued interest.
Negotiable CDs
traded in the secondary market, minimum denominations of $100,000, typically trade in $1,000,000 denominations, expiries of less than one year are common but there is no time limit
The minimum denomination for negotiable CDs is
$100,000. Typical denominations are often $1,000,000 or more
Long-term brokered CDs are not
highly liquid since there is no active secondary market.
Like most fixed-income securities they are
subject to interest-rate risk. In addition, they may be callable and have other features such as floating rates.
FDIC insurance may
not apply to long-term CDs sold by broker-dealers if the face amount exceeds $250,000
research report must be approved by a
supervisory analyst
An immediate-or-cancel (IOC) order must be
executed immediately but does not need to be executed in its entirety
A customer is willing to accept a partial execution on an order to buy up to 800 shares of XYZ stock at 30. If the client does not want the unexecuted portion to be left open, this order should be entered as
Buy 800 XYZ at 30 IOC
ETNs have a
maturity date and ETFs do not
ETNs carry issuer risk that is
tied to the creditworthiness of the financial institution backing the note
ETFs do not have
issuer credit risk
If the S&P 500 Index falls by 7% from the previous trading day's closing price, it is defined as
a Level 1 Market Decline and triggers a 15-minute trading halt
"Level 2 Market Decline" means a Market Decline
of 13%. - The Exchange will not halt trading if a Level 1 Market Decline or a Level 2 Market Decline occurs after 3:25 p.m
A "Level 3 Market Decline" means a Market Decline
of 20%. - Exchange shall halt trading in all stocks until the primary listing market opens the next trading day.
securities are sold in a restricted account
withdraw an amount equal to the FRB initial margin requirement (currently 50%) - The full amount of the sale is used to reduce the debit balance. The market value will decrease since securities were sold. The equity will remain the same since the market price and debit balance were reduced by the amount of the sale. If the customer withdraws the amount credited to the SMA, the debit balance will increase and the equity will decrease.
MSRB rules require that any quote be
bona fide (firm at the time given)
writer of a combination believes price will remain
buyer of a combination believes price will remain
According to the corporate dividend exclusion, corporations may exclude from taxation 70% of eligible dividends received from investments in stock of other corporations. For those corporations owning 20% or more of another corporation's outstanding common or preferred shares, the exclusion increases to 80% of dividends received. To find the after-tax return of each investment, multiply the return on the security by the complement of the tax rate. For the taxable non-equity position, this rate is 66% (100% minus 34%) or .66. For each taxable equity position, we assume an exclusion of 70%.
According to the corporate dividend exclusion, corporations may exclude from taxation 70% of eligible dividends received from investments in stock of other corporations. For those corporations owning 20% or more of another corporation's outstanding common or preferred shares, the exclusion increases to 80% of dividends received. To find the after-tax return of each investment, multiply the return on the security by the complement of the tax rate. For the taxable non-equity position, this rate is 66% (100% minus 34%) or .66. For each taxable equity position, we assume an exclusion of 70%.
The corporation's effective tax rate on the residual 30% of income from an equity investment, can be calculated by
multiplying the corporation's statutory tax rate of 34% by the residual percentage (34% x 30% = 10.2%). The amount the corporation would earn after tax is the complement of 10.2%, which equals 89.8% (.898).
Three- and six-month T-bills are auctioned
All T-bills are auctioned on
a discount-yield basis with noncompetitive tenders awarded first and receiving the highest yield (lowest price) of the accepted competitive tenders.
T-Bill securities are
highly liquid and may be sold by a purchaser anytime prior to maturity.
4.50% less 3/4 for a municipal bond selling in the secondary market =
$1,000 bond at 4.50 yield - $7.50
Total bonded debt is
the sum of both long-term and short-term debt of a municipality plus its applicable share of overlapping debt
CQS displays quotations by members for
NYSE and NYSE MKT (formally NYSE Amex) listed securities
Transactions in listed securities between FINRA members in the over-the-counter market are considered
third-market transactions.
municipality's debt limit is the maximum amount of
Debt a municipality may incur
bank-qualified municipal bonds
may only issue up to $10,000,000 annually - Commercial banks may receive an 80% tax deduction of the interest costs
When a customer buys and sells securities in a restricted margin account on the same day, it is called a
same-day substitution and the transactions are netted against each other
customer's SMA will be credited with an amount
equal to the net sale proceeds multiplied by the Reg T requirement (50%)
If desired, the customer may then
borrow remainder minus SMA
A stock is overbought at its
resistance level
A stock is oversold at its
support level
Buy calls when a stock
breaks through a resistance level
Buy puts when a stock
breaks through a support level
illegal practice is known as free-riding
customer would not be permitted to liquidate the stock and use the sale proceeds to pay for the margin requirement
acting as an agent an underwriting means
any unsold shares will be retained by Fred's Auto Centers
step-up CD offers an investor an interest rate that is initially
lower than current market rates will pay for that maturity period
A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares. Assuming that all of the shares are sold, what amount will the syndicate members receive for their risk on shares sold by the selling group
The members of the syndicate receive $0.25 per share for their risk. Since the selling group was allocated 1,000,000 shares, the syndicate will receive $0.25 per share on 1,000,000 shares for a total of $250,000.
11-Bond Index contains general obligation bonds with an average rating on
S&P of AA+ and on Moody's of Aa1
The 20-Bond Index has an average rating on
S&P of AA and on Moody's of Aa2.
the Municipal Bond Index
estimate of the prices of 40 long-term municipal bonds adjusted to a 6% coupon
The 20-Bond Index
AVG YTM on a particular day of 20 specific GO bonds with 20-year maturities
The 11-Bond Index
AVG YTM on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index
The Revenue Bond Index (Revdex)
The average yield to maturity on a particular day of 25 specific revenue bonds with 30-year maturities
Money received by a corporation when it sells its stock above its par value is called
capital surplus or paid-in capital
earned surplus (retained earnings), is
profits that have been retained by the company and have not been paid as dividends
A customer wishes to close out a short option position by liquidating the option. The registered representative should mark the order ticket
Closing purchase
Total Assets =
Total Liabilities + Stockholders' Equity
Uncovered call option may Not be executed in a
Cash Account
A customer gave his registered representative an order to buy 1,000 shares of GM at the market. If the execution report from the floor of the exchange states that 1,200 shares were purchased at 78, the
Customer is obligated to accept only the amount ordered, not executed
When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as
ordinary income
The death benefit on a variable annuity skips the
probate process.
Probate is a
lengthy legal process in which the decedent's bills are paid and remaining assets distributed based on instructions generally left in a will.
The recipient of a death benefit from a variable annuity may need to
pay taxes on any amount above the contract's cost basis
dispute between a registered representative and his employer
Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on
each side of the market
A registered representative who 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
This is a research report and requires approval
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 a report provides sufficient information concerning individual equity securities for a client to make an investment decision and is distributed to clients, it is considered a
research report
A research report must be approved by a
supervisory analyst and contain the proper disclosures
A notice of sale appears showing that RFQ corporation is selling 800,000 units at $60 per unit. Each unit consists of 2 shares of preferred stock and a warrant for 1/2 share of common stock. If all of the warrants are exercised, how many shares will be outstanding
1,600,000 shares of preferred and 400,000 shares of common - There will immediately be 1,600,000 (800,000 x 2) shares of preferred outstanding. If the warrants are exercised, there will be 400,000 (1/2 of 800,000) shares of common stock outstanding.
dividends paid on stock held by individuals for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date are taxed at
a maximum rate of 20%
held stock less than the 60-day period, the dividend is taxed as
ordinary income
There is a secondary market for
REITs (real estate investment trusts).
The vast majority of REITs
trade on the NYSE with prices determined by supply and demand.
Closed-end funds are funds that are
often bought and sold on the NYSE that trade in a similar manner
Mrs. Jones is interested in selling 500 shares of her REIT. The sale will be handled in a manner similar to the
Sale of a closed-end fund listed on the NYSE
IRA contributions may not be based on
rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio
Contributions to an IRA must be based on taxable compensation which includes
salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony
suitability of a Section 1035 exchange
Exchanges made within 36 months of a previous exchange are generally considered inappropriate
Under industry rules, mutual funds or annuities may not be recommended as
short-term investments or trading vehicles
When an equity (stock) option is exercised, delivery of the underlying stock and payment for the stock is expected within
3 business days (regular-way settlement for stock).
If an equity option is exercised, when is the settlement date for the stock transaction
Within three business days
Bankers' acceptances (BAs)
help facilitate foreign trade.
ADRs permit the trading of
foreign stocks in the U.S.
A municipality is issuing 50,000 bonds at a public offerings price of $1,000. The manager of the underwriting syndicate receives $1.25 per bond. The total takedown is $8.75 per bond and the selling concession is $5.00 per bond, What amount will the issuer receive
$990.00 per bond for a total of $49,500,000
A client is entitled to a reduced sales charge (breakpoint) based up the value of the accounts of
other family members within the same fund family. Examples include joint accounts, minors' accounts, and certain retirement accounts. The accounts can be held at multiple broker-dealers
permitted to purchase an equity IPO.
RRs cousin - not considered an immediate family member
additional funds for retirement and would like a vehicle that does not subject her to taxation on any growth until she begins taking distributions
variable annuity
A customer is considering writing an XYZ June 70 call for a $4 premium but is concerned about the risk of an unlimited loss. Which of the following positions, when added, provides the BEST protection
Buying an XYZ June 75 call for a premium of 1 - The maximum risk is reduced to $200, which is the difference between the strike prices 5 (75 - 70) and the net premium received 3 (4 - 1).
When part of an issue of long-term speculative bonds is called, the effect on the remaining outstanding bonds will be
an improvement in their quality.
The issue will have less debt outstanding and there will be less interest charges to pay, which
improves the quality of the issue
Various tranches of a long-term speculative bond issue are called by the issuer. The effect on the remaining outstanding bonds is likely to be
Improved quality
underwriting syndicate will determine the
underwriting concession
The breakeven point for a call spread is
the lower strike price plus the net premium
An investor buys an STC May 30 call @ 8 and sells an STC May 40 call @ 2. The investor's breakeven point is
(30(lower strikes) + 6(net premium) = 36) 36
marked to the market refers to the
adjustment made in a customer's account due to a change in the market value of the securities.
A margin account is marked to the market
once a day
customer sells short 1,000 shares of DT at $60 a share on Monday, October 14 and deposits the Regulation T margin requirement. If on October 23 the stock is trading at $75 a share
The initial Regulation T margin requirement is 50% of $60,000, or $30,000. If the market value increases to $75 a share, the equity in the account will decline to $15,000. The current equity in the account is 20% of the short market value ($15,000 / $75,000), which is below the required 30% and, therefore, a margin maintenance call will be issued
Mr. Smith is associated with two other partners in an insurance partnership. He opens a cash account for the partnership. If Mr. Smith dies, what will the firm do as far as the partnership account is concerned
the firm would freeze the assets of the account. The firm would then await the proper legal documents needed to release the assets.
A customer's margin account is as follows. Long Market Value $25,000 MNO $11,000 XYZ Debit Balance $20,000 SMA $ 800 The customer sells $3,000 of stock in the account. What will the value of the SMA be after the sale?
This account is restricted since the equity ($16,000) is less than the Reg T requirement of the account's market value ($36,000 x 50% = $18,000). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $3,000 worth of stock will be used to reduce the customer's debit balance to $17,000 and the SMA will be credited by $1,500 ($3,000 sale x 50% Reg T). This will bring the SMA up to $2,300 ($800 + $1,500).
A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. If the customer sold $1,000 of securities, what is the maximum amount the customer is permitted to withdraw after the sale
This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500
In order to qualify for a registration exemption under Rule 147, what percentage of the corporation's assets must be located in-state
must be 80% - In addition, to qualify for the exemption, 100% of the purchasers of the offering must be residents of PA.
Required minimum distributions from a traditional IRA must begin by
the year following the calendar year in which the individual turns 70 1/2.
What is a client's maximum loss if he is short KNP stock and short a KNP put
The maximum loss on a short sale is
unlimited, since there is no limit on how high the stock price may rise
gifts should be valued at the
higher of the cost or market value. For example, if tickets to a concert have a face value of $90, but the tickets were purchased at a value of $150, the higher value would be used
The gift rule does not apply to
personal gifts such as the birth of a child or a wedding gift, provided these gifts are not related to the business between the recipient and the broker- dealer
charged against the account to provide the death benefit found in annuities, as well as to cover the cost of potentially providing the annuitant with payments for life
Mortality expenses
Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor breaks even when XYZ is at:
$38.75 ($37 purchase price of the stock + the 1.75 premium on the put)
Municipal bond unit investment trusts do NOT
have certificates have coupons attached and are in bearer form
UITs are funds issued in
book-entry form and registered form
unit investment trust does not charge
a management fee. The portfolio is fixed and there is no investment adviser since unit investment trusts are supervised, not managed
A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield - A 6.25% in-state municipal bond A 6.25% out-of-state municipal bond A 9.95% investment-grade corporate bond A 10.25% mortgage bond
6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield
Equivalent Taxable Yield =
Municipal Bond Yield / (100% - Investor's Tax Bracket)
To find parity (equality in dollar value) for the stock,
divide the market price of the bond by the conversion ratio.
The market price of the bond is 102 ($1,020) and the conversion ratio is 95 to 1. Therefore, $1,020 divided by 95 equals
approximately $10.74. This would be the parity price for the stock.
A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock
If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant
The SEC Order Handling Rules require that a customer's limit order be displayed in a market maker's quote if
it improves that quote
CUSIP numbers are used to
identify securities and to distinguish them from other securities of the same issue.
A bond is still considered in good deliverable form when missing the
CUSIP numbers
Cash flow (net income or loss plus depreciation expense) is found by using an
income statement
Repurchase agreements typically are not traded in the
secondary market
Net Income - Preferred Dividends / Number of Common Shares Outstanding
A corporation has the following capital structure: 5% Convertible Bonds (conversion price is $20) $100,000 5% Preferred Stock $100,000 $1 Par Value Common Stock (5,000 shares outstanding) $ 5,000 Tax Rate is 34% Find the earnings per share after dilution, assuming earnings before interest and taxes is $50,000.
If the bonds are converted, there will be an additional 5,000 shares outstanding ($100,000 face value bonds divided by the conversion price of $20 equals 5,000 shares). The company will not need to pay the interest on the bonds since they were converted. The calculation is as follows. EPS = $33,000 - $5,000 / 5,000 shares of Common Stock plus 5,000 additional shares (fr/ conversion)
An investor purchases a municipal bond on Monday, June 6. The bond's interest payment dates are November 1 and May 1. The buyer will need to pay the seller of the bond the purchase price plus accrued interest for
Accrued interest is calculated from the last interest payment date (May 1) up to but not including the settlement date. The purchase is made Monday, June 6. The settlement date is three business days later, which is Thursday, June 9. Accrued interest is calculated up to but not including the settlement date, which is from May 1 to June 8. This equals 38 days as follows.
Only individuals are permitted to have
joint accounts.
Joint accounts may be established as
tenants in common or tenants with right of survivorship.
The broker-dealer must receive a death certificate as proof of death
before it may mark an account deceased, or change the account title in a joint account
A custodian account may be established for the benefit of
only one minor - cant be a joint account
An account for an investment club would not be a
joint account.
The sale of securities by the Federal Reserve Board in the open market results in the withdrawal of reserves from the banking system, thereby
decreasing the money supply
Accumulation units are converted to annuity units when
the individual chooses to begin receiving payments
if a limited partnership declares bankruptcy, order of payments
secured creditors, general or unsecured creditors, limited partners, and last, general partners
An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000. What is the individual's basis
$80,000 ($30,000 investment + $50,000 recourse loan) - recourse loan, the investor is liable for its repayment
Open-end companies may only issue
common stock.
Closed-end companies may issue
common stock, preferred stock, or bonds.
Currency values in a floating-rate system are established by
Supply and demand for the currency
The value of an investor's interest in a variable annuity during the accumulation period is subject to fluctuation according to the
Amount of money deposited, Performance of the separate account
The Federal Farm Credit System is composed of
Banks for Cooperatives, Federal Intermediate Credit Banks, and Federal Land Banks
placement ratio
total par value of new issues sold during the previous WEEK divided by the total par value of new issues issued during the previous WEEK
A manager with a portfolio of oil and gas stocks will most likely hedge against a downward movement by purchasing
Narrow-based index puts - As prices decline, the value of puts rises thus offsetting the decrease in the stock owned
American Depositary Receipt (ADR) issued by a British company
required to register with the SEC under the Securities Act of 1933 - issuing common stock
step-down, long-term certificates of deposit
initial interest rate is above market rates, The final interest rate is lower than the initial rate
discretionary account at a broker-dealer
RR can act on news and sell/buy whenever they think is right with principal approval
Open or good-until-cancelled (GTC) orders entered below the market
automatically reduced when stock sells ex-dividend unless marked Do Not Reduce (DNR).
Orders entered below the current market
buy limit orders, sell stop orders, and sell stop-limit orders.
Open orders above the market are
sell limit orders, buy stop, and buy stop-limit orders.
A designated market maker is permitted to hold
a stop, limit, and stop-limit order
An order that dictates to fill as much of the order as you can right now and cancel the rest is called an
immediate-or-cancel order.
Limit orders are placed as either
day or GTC orders and the unexecuted portions are placed on the designated market maker's book
GTC sell stop and sell stop-limit orders below the market and are
reduced on the ex-dividend date.
When a stock sells ex-rights (similar to ex-dividend), the designated market maker will reduce those orders on his book that were entered
below the market.
A buy limit order and a sell stop order will be
reduced by the amount the stock sells ex-rights since these orders are entered below the market
When a stock sells ex-rights what will be reduced
Buy limit order - Sell stop order
When a designated market maker stops stock, the price is
Stopping stock may be done only for a
public order
Registration as an investment adviser is
not the same as registration as a broker-dealer.
TRACE reports for
corporate bond market
transaction in TRACE
report to FINRA.
Muni Transactions reported in
Real-Time Transaction Reporting System (RTRS), operated by the MSRB.
reporting system for stocks listed on Nasdaq
There is no reporting system for
U.S. government bonds
Hedge funds often have higher fees than
mutual funds
A customer purchases $15,000 in convertible bonds (15 bonds at $1,000 par). The Federal Reserve Board margin requirement is 50% and the customer deposits $7,500. If the bonds increase in value to 108 ($16,200), how much excess equity will the customer have in the account
If the bonds increase in value to $16,200, the equity in the account will be $8,700 (market value of $16,200 - $7,500 debit balance). The initial FRB requirement on $16,200 market value is $8,100 (50% x $16,200). Since there is $8,700 of equity, there is $600 of excess ($8,700 equity - $8,100 requirement
Matured debt is debt of the municipality that
is no longer outstanding
Contributions to an IRA must be made in
fundamental analyst focuses on
information obtained in an Annual Report of a corporation
Technical analysts use
price and trading volume information
Margin requirements established by the FRB may be
increased by broker-dealers in the form of in-house rules
investor sells short an ETF, this transaction must be executed in a
margin account
When bonds are called for redemption, the bondholder
can only redeem the bonds at the callable price or otherwise sell them in the market
last day to buy and rexiece ex-div
business day prior to the ex-date
OTC equity securities are not
cant extend credit (marginable) on mutual fund shares until
30 days after their purchase.
Premature withdrawals of IRA or Keogh
10% penalty
foreign tax may be claimed as a
deduction or a credit
customer purchases securities and fails to pay
firm will sell out the securities and freeze the account for 90 days
Which of the following securities is MOST appropriate for an investor seeking to buy a new home within the next year
A long-term CD purchased in the secondary market, that matures in 12 months
Issuer-directed securities (new issue rule) provide an exemption for
parent company of the issuer, the subsidiary of an issuer, and employees and directors of an issuer, immediate family members of employees and directors, Registered representatives if the issuer is that person's employing broker-dealer or is the parent or subsidiary of the broker-dealer
Debt service expenses are paid first only in
gross revenue pledges
An investor purchases 100 shares of XYZ at 60 and also writes an XYZ 65 call @ 3. What is the investor's maximum potential loss? $5,700 $6,300 $6,500 $6,800 Explanation: Incorrect. The investor will suffer a loss if the price of XYZ declines. XYZ could go bankrupt and the price of the stock would decline to zero. The investor will have a loss of $6,000 (his original cost) on the stock, which will be partly offset by the $300 premium received from writing the call. His net loss is then $5,700. (71814)
this is wrong max loss is unlimted
SROs have rules designed to
maintain a fair and equitable market and require that firms use reasonable diligence to provide customers with best execution
The index increases or decreases based on the
expected volatility of the market.
If an investor expects volatility to rise, she would be
bullish on the VIX.
A bullish option strategy such as long calls, put credit spreads (executed for a net credit), or call debit spreads (executed for a net debit) would enable the investor to
profit if the VIX increases.
Many investors buy VIX call options as a
hedge against a possible decline in the market since the VIX usually moves inversely with the equity market.
municipal bond typically have the
lowest yield since it is exempt from federal income tax
GO bonds
lower yield than Rev - Safer than Rev
besttax benefit from an oil and gas program is
depletion deduction
5% Markup
If an investor expects yields (interest rates) to rise, he will
buy yield-based calls or sell yield-based puts.
Yield-based options are cash-settled options based on a particular Treasury security's movement in
yield - Not Inverted
for a public offering, the spread represents the
difference between the price that the issuer receives from an underwriter for its IPO and the price that a customer pays for the IPO
RR can not have customers mail
forwarded to him - violation of SRO rules - can be to firm (3months) or General PO Box
self-employed individual Max deductible contribution in Keogh account
20% of self-employed income, up to a maximum of $53,000, which ever is less
short stock has.
unlimited risk potential
A put writer who sells the underlying stock short has
unlimited risk potential
A block of bonds is offered firm by Dealer A to Dealer B for one hour with a five-minute recall. Dealer A calls Dealer B and says, fill or kill. Dealer B
Has five minutes to take the bonds - invoking the five minute recall
Regulation T for a new issue in a cash account is due
two business days following the settlement date
If interest rates are expected to rise, the most suitable investments
those that can be reinvested quickly to - variable or adjustable-rate securities
trading based on insider information or communicating such information to others who use the information.
a tipper
GO Bonds require
Voter Approval
special tax bond financed by a tax other than an ad valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require
voter approval.
A certificate of participation (COP) is a revenue bond backed by a lease payment does not
require voter approval.
A corporation is planning to issue new stock to the public but has not yet filed a registration statement with the SEC, RR can only
Discuss the offering with investment bankers at firm
customer can use a Number for an account only if they
sign the statement acknowledging their account
moving to the payout phase of a variable annuity payments are based on
performance of the subaccount products in the separate account
sector fund (securities of a specific industry or specific geographic location)
income Not a primary objective
acquiring $100,000 of bonds that mature each year over the next 10 years is called
Laddering the portfolio
client is considering exchanging one variable annuity for another
ask if within the previous 36 months, documented in writing, frequent exchanges can be considered churning, must be suitable
subscription agreement for a direct participation program (DPP)
suitability standards, who must sign the agreement, whom check must be made payable, understands risk, meet the financial requirements
offering documents
Priority provisions liquidating a limited partnership, and the tax implications
shorting stock trading at less than $5.00 per share, requirment is
the greater of $2.50 per share or 100% of the market value. stock less than $2.50 per share, the maintenance requirement is $2.50 per share, while the maintenance requirement for shorting stocks between $2.50 and $5.00 per share is 100% of the market value
A DMM is not permitted to
compete with public orders when trading for its own account.
The DMM may
buy stock at a higher price or sell stock at a lower price
money-market mutual funds
They are no-load funds - Dividends are computed daily and credited monthly
A withholding tax of 20% may apply when a person
moves funds from one retirement account to another.
Withholding tax can be avoided when funds are
transferred from one retirement account to another.
There are two methods of transfers,
funds are sent directly between custodians (trustee-to-trustee) - check is made payable to the new trustee.
If the check is made payable to the plan participant, it is defined as a rollover and a
withholding tax may apply.
Funds from a retirement plan may not be transferred
directly to the employee's personal bank account.
securities issued by the federal government are exempt from
state and local taxes
fed funds rate is the
rate charged by one bank with excess reserves to another bank needing overnight loans to meet reserve requirements - NOT controlled by FED
In order to charge the maximum 8.5% sales charge, mutual funds must
offer breakpoints and rights of accumulation
A stock closes at $37. The next day the stock sells ex-dividend $0.68 per share. At what price will the stock open the next day if it opens at the same level it closed the day before
stock is reduced by an amount sufficient to cover the dividend. The price will be reduced by 68 cents. Therefore, $37 - .68 = $36.32
issuing new shares through a rights offering, cust tenders (submit) rights to
transfer agents
The Federal Reserve will
Sell during inflationary - Buy during deflationary
investor is concerned about inflationary risk, wants tax-deferred growth, and is willing to accept a moderate degree of risk to his initial investment,
variable annuities are the most appropriate investment
The Consolidated Quotation System (CQS) provides subscribers
with bid/asked quotations for securities listed on national exchanges, including quotes from OTC market makers in those securities (the third market).
(Morgan Stanley Capital International Europe, Australasia, and Far East) Index excludes U.S. and Canada
FTSE Index
companies trading on the London Stock Exchange
documents required to be sent to the purchaser of a new issue of a municipal bond
confirmation and An official statement of the issuer
municipal securities are exempt from filing an
offering document
U.S. government notes have a
next-business-day settlement and delivery date.
T Note Payment is due on the
next business day
Foreign investments in the U.S. will direct money into the country, helping the U.S.
balance of payments
A registered representative is sending an e-mail to 50 individual investors. This is defined as a(n)
Retail communication - any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period
tax consequences of a variable life insurance policy holder dieing
value of the policy will be included in estate for tax purposes
stop order to sell 1,000 shares of ATT at 35. The order will be executed at
next trade after 35 is touched - After the order is activated at or below 35, the next trade will be the execution price.
Stop orders become market
orders once they are activated
An investor who holds stock in a company that is the subject of a tender offer may tender
only stock that he holds long.
If a shareholder has Written call option positions against the long stock, the options positions will
reduce his net long holdings in the stock
Company R has announced a tender offer for Company T. A shareholder of Company T is long 1,000 shares of stock and has written 5 covered calls against the stock. For the purpose of tendering shares, the shareholder may tender
500 Shares (1,000 long - 500 options Written)
Treasury STRIPS do not pay
periodic interest and are traded without accrued interest
The price-earnings ratio of the Dow Jones stocks is an indicator that a
fundamental analyst will examine
a registered representative makes a recommendation to a customer
concerned with Suitability not profitability
any gain or loss on a short (selling) position is treated as
A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would need a municipal bond with a yield of
8.6% - multiply the yield by the complement of the tax bracket. The net yield is 8.6% (12% yield multiplied by 72%, which is the complement of the tax bracket)
LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio
$1.10 x 4(each quater) = $4.40., The price/earnings ratio is 10.9 ($48 / $4.40 = 10.9
S&P's best rating for notes
SP-1 and its worst rating is SP-3.
S&P's best rating for bonds
AAA worst is Aaa
A reverse convertible security would be MOST suitable for an investor who
Desires higher yield and is anticipating the value of the underlying asset will remain stable
Decisions of a Hearing Panel regarding complaints can be appealed to the
National Adjudicatory Council. Arbitration decisions are final
converting bonds to stock, bond convertible at 40
divide the par value of the bond by the conversion price ($1,000 divided by 40 = 25), $1,025 (25 shares x $41 = $1,025)
The prices of preferred stocks are inversely related to the movement of
interest rates, as are bonds
Someone who wants to hedge a portfolio of preferred stocks will buy
Yield-based call options
The maximum potential loss for a debit spread is the
net premium
An investor buys an STC May 30 call @ 8 and sells an STC May 40 call @ 2. The investor's maximum potential loss
is $600
Short interest and trading volume are
technical indicators
EPS and the P/E ratio are
fundamental indicators
trade has the symbol SLD next to it, indicating that a trade occurred
previously (assume prior to the other trades shown), was reported out of sequence
A customer enters a sell stop-limit order for 100 XYZ at 25.50. XYZ trades occur as follows: 25.50, 25.25, 25.13, SLD 25.50. The customer's order was
Not executed - stock must increase to at least 25.50 for an execution - SLD price was reported previously
A new municipal bond issue is dated January 1 and pays interest each April 1 and Oct. 1. An investor purchased bonds from the issuer with a Thursday, January 31 settlement date. How many days of accrued interest does the investor owe
30 - owes from January 1 to January 30 (30 days)
The operating profit margin and the bond coverage ratio can be calculated by examining the
income statement.
The current ratio is found by dividing the
current assets by the current liabilities
The debt-to-equity ratio is found by dividing the
dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings
can be calculated by examining the balance sheet of a company
The debt-to-equity ratio - The current ratio
order of priorities that you would follow when opening an options account for a customer
Send the customer an Options Clearing Corporation risk disclosure document - Have the registered options principal approve the account - Enter the order - Have the customer sign the options agreement
has the highest DPP profit potential
wildcatting - prospecting for oil
Asset allocation funds
diversified portfolios of stocks, bonds, and money-market instruments - managed by fund manager
ender offer may tender only stock that is
held long
A firm needs to disclose in a report that it owns shares of the stock, but not
the actual number
If rates have declined for the past three years and reached a normal level, the present yield curve would
most likely be ascending, which is also referred to as positive or upward sloping.
term issue, bonds mature in one specific year. To accumulate monies to help retire the bonds, the issuer will deposit monies (above the amount to pay interest) in a
sinking fund
EIAs (equity-indexed annuity) are not considered
risks involved in buying thin issues
probability of wide price fluctuations (volatility) and because of the small amount of the shares outstanding.
firm isinvolved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period for
40 days following an IPO or 10 days following a secondary offering
syndicate member or selling group member, the firm would need to wait
25 days
Option contracts have no loan value and therefore may not be used as
collateral in a margin account
LEAPS can be bought on
margin - have loan value
LEAPS are equity options that can have a maximum life of
39 months
Advertising for municipal fund securities investments must be approved prior to its official use by
principal of the firm who is selling the program
The minimum maintenance requirement Long Account
25% of the market value of the securities in the account
Annuitants will receive the greatest cash flow from the
straight-life annuity payout option - greatest risk
This option allows an annuitant to receive payments for
his lifetime.
At death, the payments
cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments.
Nasdaq Level I
the inside market - highest bid and the lowest offer for a security
renewal and replacement fund holds monies put aside for the
improvement of the facility
Money put aside on a municipal revenue issue for the betterment and improvement of the facility is placed in the
Renewal and replacement fund
A letter of intent (LOI) enables an investor to qualify for a reduced sales charge based on the breakpoint schedule of a mutual fund, without
initially depositing the entire amount required.
The LOI states the investor's intention to deposit the required money within
13 months of the inception of the letter. It may not be renewed for another 13 months.
The letter of intent may be backdated for up to
90 days, but may not be extended for 90 days
planned amortization class (PAC) type of CMO provides a
predetermined schedule of principal repayment - that is designed for more risk-averse investors
A leveraged ETF is designed to deliver a
multiple of the performance of an index or other benchmark.
a 3X leveraged ETF based on the DJIA seeks to deliver
three times the performance of that index.
if the DJIA rises or falls by 1%, a leveraged ETF would
increase or decrease by 3% before fees and expenses.
The term opening sale applies to the
seller (writer) of a listed option
If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to
5% of the long position.
A client is long and short 1,000 shares of the same security. If the current market value is $80,000, the client is permitted to borrow up to:
$4,000 (5% of $80,000). Therefore, the client is permitted to borrow 95% of $80,000, or $76,000.
the SEC and FINRA may discipline a
registered representative - for fraudulent securities activities
requirement for holding securities in street name is that they must be
segregated - Segregate the securities from the B/D's own securities
Ginnie Mae securities or the Government National Mortgage Association securities (GNMAs) are fully guaranteed as to principal and interest by the
federal government
GNMA pass-through certificates are
guaranteed by the U.S. Gov - Interest and principal payments received monthly - receive principal payments before, not at maturity - Fully Taxable
maximum underwriting compensation for selling limited partnerships in public offerings is:
Stopping stock is done by the
designated market maker (specialist) to guarantee a price for a public order.
The designated market maker does
not need permission of an exchange official to Stop Stock
customer is considering writing an XYZ April 90 put for an $8 premium but is concerned about the risk of a large loss. Which of the following positions, when added, provides the BEST protection
Buying an XYZ April 80 put for a premium of 2
If the customer buys an XYZ April 80 put for 2, it becomes a
credit spread.
The maximum risk is reduced to $400, which is the
difference between the strike prices (10) and the net premium received (6).
Members of a secondary market joint account must
publish the same offering price
members are not permitted to disseminate
more than one quote relating to the account's securities
The largest portion of the underwriting spread in a municipal securities issue is the
total takedown - additional takedown plus the concession
duplicate account statements must be sent if an employee of a member firm opens a brokerage account at
another member, investment adviser, bank, or other financial institution
A member firm is required to send duplicate account statements to FINRA when
a customer of the firm is an employee of FINRA
Anyone may set up or deposit funds in a
Coverdell Education Savings Account - Max $2,000 in any one year
A registered representative is sending an e-mail to banks and investment advisers in anticipation of a new product being offered by the firm. This is defined as a(n):
Institutional communication
made available to 25 or fewer retail investors within any 30 calendar-day period.
Institutional communication
made available only to institutional investors. This would not include any internal communication by the broker-dealer.
Retail communication
communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period.
Public appearances
sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn).
if preferred stock is noncumulative, it means that if the dividend is not paid, it does
not accumulate to the next year
Depreciation is a non-cash expense and it is added
to cash flow.
Cash flow =
Net Income or Loss + Depreciation Expense
A corporate resolution authorizing a person to trade for the account is necessary to open a
corporate cash account
A corporation wishes to open a cash account. Which of the following documents is required
A corporate resolution
Eurodollar bonds are
USD$-denominated bonds issued and sold outside the U.S.
They may trade in the U.S. after a seasoning period of
40 days after issuance.
To be listed on the NYSE, a corporation must have
a minimum number of round-lot shareholders, a minimum number of publicly held shares, a minimum aggregate market value of publicly held shares, a positive earnings history, national interest in the corporation, and agreement to solicit proxies
prospectuses must continue to be delivered on all purchases in the aftermarket for
25 days
A broker-dealer is underwriting an initial public offering (IPO) for a company that will be listed on the NYSE. The broker-dealer is required to deliver prospectuses
For 25 days after the effective date
In a repurchase agreement (repo), a dealer sells securities to another dealer or investor and agrees to buy them back at a specific time and price.
In effect, the selling dealer borrows money from another party and collateralizes the transaction with the securities. The other side is lending money and is receiving interest from the dealer creating the repo.
BEST described as collateralized loans
Repurchase agreements
In a repurchase agreement, a firm sells securities to another firm and agrees to repurchase them at a specific time and a specific price, which produces an agreed-upon rate of return
one firm is borrowing money from the other with securities as collateral
Repurchase agreements (repos) and reverse repos would MOST likely be used by
Institutions that have a need to borrow on a short-term basis, or have money to lend on a short-term basis
MSRB rules require a syndicate member to
disclose to the syndicate an order for a unit investment trust or an accumulation account to be used for a unit investment trust.
The disclosure is accomplished by entering the order as a
related portfolio order
Investment bankers provide financing for corporations by
bringing an issue, whether debt or equity, to market for the issuer - Underwriting an IPO
investment banking department will also assist companies with
mergers and acquisitions
The investment banking department does not
make a secondary market for new issues
Easy-to-Borrow lists
aid in the process of locating securities - must be less than 24 hours old, provide reasonable grounds for belief that a security on the list will be available to be borrowed - expedites the fulfillment of the locate provision
Hard-to-Borrow list
securities that a clearing broker-dealer may have difficulty in borrowing
joint and last survivor provide the
longest stream of income as it guarantees payments until the last annuitant dies
When redeeming shares of an open-end investment company (mutual fund), an investor receives the
NAV (bid price) minus any redemption fee
An investor owns 1,000 shares of an open-end investment company. The bid price is $11.00 and the offer price is $11.58. The investment company charges a 1/2% redemption fee. If the investor redeems his 1,000 shares, how much will he receive
investor would receive $11,000 (1,000 shares x $11.00 NAV) minus the redemption fee of $55 ($11,000 x 1/2%), which equals $10,945
Outstanding shares =
issued shares minus treasury stock (shares repurchased by the company)
XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of the outstanding common stock is
$90,000,000: (5,000,000 - 500,000) = 4,500,000 shares outstanding with a market value of $20.00 per share
An investor in the U.S. purchases the debt of a German company. The bonds are denominated in euros. Which of the following risks will the investor be exposed to
Interest-rate risk, Credit risk, and Currency risk
The theory that states that the small investor is usually wrong because he is uninformed, buying at market peaks and selling at market bottoms, is called the
odd-lot theory.
According to this theory, the small investor can afford only to buy
an odd-lot (less than 100 shares of stock).
Odd-lot buying on balance (more buying than selling) is
odd-lot selling on balance (more selling than buying) is
REITs invest in many different types of
residential and commercial income-producing real estate such as apartment buildings, hotels, shopping centers, office complexes, storage facilities, hospitals, and nursing homes.
REIT Income is received from
the rental income paid by the tenant leasing the real estate owned by the REIT
REITs must pay
a minimum of 90% of their taxable income and the dividends received by investors are taxed at the same rate as ordinary income.
The dividends paid to shareholders of REITs do
not qualify for the lower 20% tax rate given other types of common and preferred stock.
REITS can be suitable for both
retail and institutional investors.
Most REITs are traded on
an exchange, such as the NYSE, and offer investors a high degree of liquidity.
Nontraded REITs do not have
their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity.
Both invest in various types of real estate and are subject to the same
tax consequences (90% distribution on taxable income).
Since they are both registered, they are required to make the same
disclosures to investors
in a DPP when the project's revenues exceed expenses and net income is produced
crossover point
If a customer indicates the specific stock and amount registered representative is permitted to choose the
time and price of execution
time and price of execution
not considered a discretionary order
A customer does not have a discretionary account with his brokerage firm. The firm may decide
The price if the customer specifies the security and quantity
Investment-grade (highly rated) corporate bonds offer an investor
safety of income and preservation of capital
corporate bonds risk of default is
The investor realizes income as well as
preservation of capital
the sale and purchase of bonds (or other securities) to realize a capital loss that can be offset against a capital gain
tax swap
If the holder of an industrial revenue bond is a substantial user of the facility, then the
federal tax exemption on the interest earned does not apply
A bond swap is done to
Increase the overall yield of the bond portfolio - Increase the current income of a bond portfolio - Establish a tax loss to offset income
tool most commonly used by the FRB to regulate the amount of money and credit in the banking system
Open market operations
municipal bond can be rejected if it is
missing a legal opinion, has missing or mutilated coupons, or the certificate is mutilated
municipal bond may not be rejected because
of a sudden change in market price.
buy stop is entered
above the current market price
The stop will activate on the first round-lot trade, which occurs
at or through (above, since this is a buy stop) the stop price.
Long-term, high-grade bonds are relatively safe investments, but do have
purchasing-power risk.
Because the amount of interest income is fixed, the
purchasing power of the interest income may decline over the long term because of inflation.
A rise in inflation
reduces the amount of goods and services that can be purchased with the fixed amount of dollars.
Ratings and denominations are
not included on the confirmation
MSRB rules require that a confirmation be sent to a customer
at or before the completion of the transaction (settlement date)
confirmation must include
whether the customer purchased or sold, the par amount, and a complete description of the securities, including the coupon and the maturity date. Any pertinent call feature must be shown as well as the principal amount, accrued interest, and the total amount of the transaction. The broker-dealer must disclose if it acted as principal or agent and, if acting as an agent, the amount of the commission must be disclosed.
MSRB rules do not require that the
name of the bond counsel be disclosed on a confirmation
The federal funds rate is the
rate that one bank charges another bank for overnight borrowing
borrowing is done when a bank is
in need of reserves
If the fed funds rate is steadily rising, it indicates that the Federal Reserve is
tightening credit
banks may find
difficulty in obtaining overnight loans to meet reserve requirements
An individual purchases one XYZ 40 call for 4 and one XYZ 50 call for 2. The market price of XYZ stock is currently 43. The individual's breakeven price is
The net borrowing cost to a municipal issuer of a Direct Pay Build America Bond (BAB) with a 7% interest rate is:
The Treasury will reimburse 35% of the interest payment, which results in a net borrowing cost of 4.55% (7.00% x [100% - 35%])
These bonds may be suitable for
taxable, fixed-income investors.
BABs allow a municipality to issue a bond with
a higher interest rate, but pay an equivalent tax-free rate.
Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for
refundings, working capital, and private activity bonds
Green Shoe clause that allows the syndicate to increase the number of shares sold by
15% over the original number of shares in the offering.
Due to their unique characteristics, CMOs may not be
compared to any other types of investment
A face-amount certificate and a management company are two types of
investment companies
The Investment Company Act of 1940 does not consider
holding companies and insurance companies to be investment companies
An RR is permitted to contact a person whose name is on the Do Not Call list if the person has
provided their # prior express written consent
A customer purchases 10 MMS May 20 puts at 2 in a cash account when the market price of MMS is 24. Settlement and Payment are
settlement is one business day - Regulation T payment is five business days
According to Regulation T, payments for transactions in cash and margin accounts must be made by the customer within
two business days following the regular-way settlement date
regular-way transactions settle in
three business days
customers have
five business days in which to pay for purchases
he process of returning securities that were previously accepted on the settlement date
when the brokerage firm refuses delivery of the securities on the settlement date
make the decision to stop trading the options, when there is a halt in the trading of a security that underlies option contracts
Officials of the exchange on which the options trade
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is
After the order was activated by the round-lot sale of 18.25 (which is at or lower than 18.50), the order became a
limit order to sell 100 shares at 18.50 or better.
18.50 is the first price that
meets this requirement and is the execution price.
Spinoff transactions occur when a company is
seeking to divest a division.
In a spinoff, each shareholder of the parent retains her original shares, but is also
given shares in the newly created entity
The Taft Food Company intends to distribute shares of its grocery business to existing stockholders. The shares of this company will be traded separately from Taft. This is an example of a(n)
Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens an account at
another member, investment adviser, bank, or other financial institution
A registered representative enters an order for a client. In error, the RR purchases shares of the wrong security
shares must be placed in the broker-dealer's error account
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1. The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on
The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on the
record date, which is given in this example as December 1.
A charity has received restricted stock from the director of a corporation. The director owned the stock for two years before giving it to the charity. According to SEC Rule 144, the charity may sell the stock:
Freely under Rule 144
The charity may sell the stock freely (immediately) since
the required holding period for restricted stock has already been met by the director
The bid price of a mutual fund is
net asset value (NAV) and is the price a customer will receive if shares are sold
The offer price of a mutual fund is
the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund.
wildcatting program, also called an exploratory program, searches for oil in unproven areas. This results in a
lower cost of acquiring the land or mineral rights. In order to extract oil and gas, the program will incur significant start-up or up-front costs
All options stop trading
ON the third Friday of the month - not the next day
an owner of a variable annuity has the income tax
An owner of a mutual fund will have to pay taxes on dividends received
that year
research department must be separate from its
investment banking department - to avoid conflicts of interest
if an XYZ July 50 put is purchased for $5 when the market price is $47, the
intrinsic value (in-the-money value) is $3 and the time value is $2.
As the put nears expiration, the time value gradually
dissipates, which is a disadvantage to the buyer.
An individual who is covered by a corporate pension plan may continue to make pretax contributions of up to
$5,500 to an IRA providing the individual's income does not exceed specified levels
A failed auction occurs when there are
not enough bids to cover the amount of auction rate securities being sold.
In this situation, the holders will continue to hold the securities and the interest rate will be set to the
maximum rate allowed in the program documents.
This rate is normally
higher than the rate that would have cleared a successful auction.
The SEC has provided
several examples of documents that can be relied on by the seller when establishing its belief that a purchaser is a qualified institutional buyer
Rule 145 applies to
mergers, consolidations, reclassifications of securities, or transfers of corporate assets.
Rule 145 requires a company to provide
written disclosures to shareholders in connection with the previously listed corporate actions.
Mutual funds sell ex-dividend
whenever the fund or its principal underwriter (sponsor) determines.
The ex-dividend date for a mutual fund is usually the
same day as the record date
Regulation FD applies to
issuers of securities.
Regulation FD requires that material, nonpublic information disclosed to analysts or other investors be
made public
payout on a variable annuity
A fixed number of annuity units multiplied by a variable dollar amount
When payments begin on a variable annuity, the annuitant is
credited with a specific number of annuity units. This number will remain fixed.
The annuitant's monthly payment will
vary according to the value of the securities representing the units
The payout on a variable annuity is based on a
Fixed number of annuity units with a fluctuating value per unit
An accumulation unit in a variable annuity contract is an
accounting measure used to determine the contract owner's interest in the separate account.
The separate account is the
portfolio in which the customer's contributions are invested.
Some separate accounts consist of several
subaccounts, with differing objectives and portfolios
The 5% Markup Policy applies when a member firm
Acts as a dealer in a transaction with a customer
A municipal dealer purchased $100,000 face value of 6.00% bonds at a 6.00 basis. If the dealer reoffered the bonds, which TWO of the following choices will be considered reasonable
The dealer purchased the bonds at par (6% coupon at a 6.00 basis). When reoffering the bonds, the dealer's markup should be reasonable. A one-point markup (101) is considered reasonable, whereas an eight-point markup (108) is not. An offering of 5.80 represents a reduction in yield of 20 basis points and is considered reasonable. A reduction in yield of 200 basis points (6.00 basis minus 4.00 basis reoffering) is excessive.
A BA (banker's acceptance) is used to
facilitate foreign trade.
It is a time draft that has been
guaranteed (collateralized) by a bank
An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is:
$2,000 - Net Premium -
Industrial development revenue bonds are backed by
The corporate guarantor - credit rating of these bonds is dependent on that corporation, not on the municipality issuing the bonds
The SRO minimum maintenance requirement for a short position is
30% of the market value
A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. What is the minimum equity requirement for the short position
The market value is $7,000, and 30% of $7,000 equals $2,100
Dow Jones Composite Index
30 industrial stocks, 20 transportation stocks, and 15 utility stocks
primary source for a quote in the secondary market and assists the trader in finding the best price on a specific issue
broker's broker
Duties of the ROP
Reviewing selected customer accounts - Establishing option training programs for registered representatives and ROPs - Reviewing retail communications
call feature used when computing the dollar price of a municipal bond sold on a yield basis
In-whole call
credit strength of a municipal issuer
condition of the local economy - general capability of the fiscal officers of the municipality
CMO is yielding 5.95% while the Comparable Treasury is yielding 5.10%
yield pick-up on the CMO is 85 basis points
investing a large sum of money in four different mutual fund families, will not allow
customer to receive sales breakpoints
Equity options expire on
3rd Friday at 11:59 p.m. EST
convertible preferred stock that was originally purchased at $106. The stock is convertible at $25, stock is converted costs basis will be
$106 ÷ 4 = $26.50 - the par value of the preferred stock ($100) is divided by the conversion price ($25). As a result, four shares of common stock are received upon conversion. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4).
Spiders (SPDRs) is an investment that replicates the
S&P 500 Index
Diamonds (ETF) mirrors the performance of the
ADRs (American Depositary Receipts) issued as proxies for different types of
individual foreign shares
VRDOs (variable-rate demand obligations) municipal security structured for
tax-free money-market and high-net-worth investors
client owns a portfolio of blue-chip equity securities and wants to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to
Write covered calls
The most conservative strategy for the investor to achieve her objective is to
write covered calls.
The call premium received will increase the yield on her portfolio of stocks because it will
add to the income generated by the dividends received from the stock
Actuarial calculations are used to determine the
amount of money that an employer must deposit each year in the plan to provide for the retirement benefit specified by the plan
A defined benefit plan promises to pay the employee a
specified amount of money each year once the employee retires.
This benefit payment is usually based on
age, years of service, and salary history.
actuarial calculation used to determine the employer's contribution
A defined benefit plan
Options expiring in nine months or less may not be bought on
They do not have
loan value and, therefore, must be paid in full
credit may be extended to purchase
LEAPS with more than nine months to expiration
redeeming mutual fund shares, the fund company must send the payment within
7 Days
A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account. Only the MFP signs the check. According to the MSRB political contribution rules, the contribution would be viewed as a
$400 contribution from the MFP
Knowing a client's tax bracket is particularly useful when evaluating the suitability of
municipal bonds.
The interest on municipal bonds is typically tax-exempt, which is
less of an advantage if the client is in a low tax bracket
two or more issues of revenue bonds have the same claim against revenue or are backed by the same pledged revenues
parity bond
backed by a source of revenue and the full faith and credit of an issuer that has taxing power, i.e., a general obligation (GO) bond issuer.
double-barreled bond
municipal revenue bonds that are payable by the state if revenues from the project do not satisfy debt service payments, approval required
Moral obligation bonds
General obligation bonds require
voter approval
It is a violation of federal law for anyone to tender the stock that a customer borrowed in a
short margin account.
The stock has been temporarily borrowed and does not belong to the customer and may not be
A customer has a discretionary account at a broker-dealer. The customer has received a research report and has indicated that she may want to purchase a stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take
Purchase the stock on behalf of the customer and have the order approved promptly by a principal
An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method.
The taxes due are the greater of the two calculations
A broker-dealer is acting as a principal when
buying for or selling from inventory
corporation may not
write calls covered by its own stock
preferred stock is a fixed-income security paying a fixed dividend each quarter, it is affected by interest rates in the same way as