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Financial Instruments and Regulations, Exams of Business Fundamentals

A wide range of topics related to financial instruments and regulations in the securities industry. It discusses various types of investments, including money market instruments, direct participation programs, exchange-traded funds, annuities, and more. The document also covers regulatory aspects such as finra membership eligibility, continuing education requirements, and rules regarding customer account statements and transactions. Additionally, it touches on investment risks, tax implications, and other relevant concepts. This comprehensive coverage makes the document a valuable resource for understanding the complex landscape of financial products and the regulatory framework governing the securities industry.

Typology: Exams

2023/2024

Available from 09/21/2024

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Download Financial Instruments and Regulations and more Exams Business Fundamentals in PDF only on Docsity! SIE FINRA Exam 734 Questions with Verified Answers The Federal regulatory body that governs the securities industry is: - CORRECT ANSWER The SEC A fully disclosed BD: - CORRECT ANSWER is an inducing firm clearing its transactions through a carrying firm An intermediary between the buy and sell sides of a transaction is known as - CORRECT ANSWER a clearing agent For the Depository Trust and Clearing Corporation (DTCC), all of the following are true EXCEPT: a. it is a member of the Federal Reserve System b. It acts as a retail bank servicing savings and checking accounts c. it serves for the purpose of providing custody of securities d. it is a worldwide clearing agent - CORRECT ANSWER b. it acts as a retail bank servicing savings and checking accounts Your BD acts as a prime broker for an institutional account. In this arrangement, your BD is likely to be providing which of the following services? - CORRECT ANSWER clearing and transaction settlement services for executing brokers An individual or institution willing to hold securities positions in its own proprietary account for the purpose of providing liquidity to the marketplace is - CORRECT ANSWER a market maker An entity such as a corporation wishing to offer securities for sale to the public for the purpose of raising capital is - CORRECT ANSWER an issuer A nonprofit organization requiring members to pay assessments into a general insurance fund used to meet customer claims in the event of a BD bankruptcy is - CORRECT ANSWER the Securities Investors Protection Corporation (SIPC) The FDIC provides insurance guaranteeing the safety of a depositor's accounts in FDIC member banks for each deposit up to: - CORRECT ANSWER $250,000 Determining monetary policy and taking actions to implement those policies is the responsibility of - CORRECT ANSWER the Federal Reserve Board (FRB) The Magnolia Steel Corporation needs to build a refinery plant. It is estimated to cost $750 million to complete. What market can be used to raise the money needed to build the new plant? - CORRECT ANSWER Secondary Market When securities are sold to the investing public in what are known as issuer transactions, the transactions are being done in: - CORRECT ANSWER the primary market If an investment company bought stock directly from a bank, bypassing any intermediary or broker, this trade took place in - CORRECT ANSWER the fourth market Which of the following statements regarding the third market is TRUE? a. it refers to trading of unlisted stocks directly between institutional investors b. the services of a broker acting as an agent or intermediary are not used c. It is composed of listed securities traded OTC d. it is composed only of unlisted securities - CORRECT ANSWER c. It is composed of listed securities traded OTC An investor enters an order to purchase shares of XYZ stock. Another investor enters an order to sell XYZ stock. These two orders meet on the floor of a US Stock Exchange where they are executed. This transaction too place in: - CORRECT ANSWER the secondary market Assuming all other factors to remain constant, an increase in imports would most likely cause GDP to - CORRECT ANSWER decrease Which state of the business cycle is characterized by rising interest rates and higher wages? - CORRECT ANSWER Expansion E. __ Once the SEC approves a registration, the cooling-off period ends and an effective date is established - CORRECT ANSWER A: T B: F C: T D: T E: F The Uniform Securities Act (USA) is the template from which state securities laws are derived. Under the USA, a BD would have to register with the state under all of the following conditions EXCEPT: a. There was an office in the state b. Calls were directed to prospects in the state c. The BD made a market in municipal bonds issued by the state D. Calls were received from clients in the state - CORRECT ANSWER c. The BD made a market in municipal bonds issued by the state An issuer wishing to raise additional capital engages the services of an under- writer who proposes limiting the sale to the 6 New England states. In doing so, it is most likely that the registration method to be used will be - CORRECT ANSWER Coordination Under the Securities Act of 1933, a corporation may qualify for an exemption from the registration statement and prospectus requirements under all of the following exclusionary provisions EXCEPT: a. Regulation A+ b. Regulation B c. Rule 147 d. The Investment Advisers Act - CORRECT ANSWER d. The Investment Advisers Act Miguel Reyes purchased $200,000 of ABC corporation common stock 5 years ago. At one point, the value of his investment doubled. However, as a result of a recent class action lawsuit, the company has been ordered to pay 50% more than the company's net worth, and ABC filed for bankruptcy. What is the maximum loss that Reyes can lose on his investment? - CORRECT ANSWER No more than his original investment of $200,000 Rights of common stockholders include all of the following EXCEPT: a. voting for the board of directors (BOD) b. transferring ownership of the stock at any time c. receiving audited semiannual reports d. preemptive rights - CORRECT ANSWER c. receiving audited semiannual reports Zoe Smith wants to invest $100,000 in ABC common stock. Which of the following would be appropriate objectives when placing the order? I. A long-term hedge against inflation II. The limited liability of ABC's common stock III. The stock may appreciate in value and pay a consistent cash dividend IV. The need for monthly dividend checks - CORRECT ANSWER A long term hedge against inflation The stock may appreciate in value and pay a consistent cash dividend Which two of the following preference items define preferred stock? I. Preferred dividends must be paid before paying common dividends II. Preferred dividends are guaranteed; common dividends are not III. Preferred stockholders are paid before common stockholders in the event of liquidation IV. Preferred stockholders voting rights exceed those of common stockholders - CORRECT ANSWER Preferred dividends must be paid before paying common dividends Preferred stockholders are paid before common stockholders in the event of liquidation Define Callable - CORRECT ANSWER Often redeemed by the issuer when interest rates fall Define Convertible - CORRECT ANSWER May be exchanged for shares of the corporation's common stock Define Cumulative - CORRECT ANSWER Is entitled to dividend in arrears Define Straight - CORRECT ANSWER No special privileges; dividends not paid are not recovered Define Participating - CORRECT ANSWER May receive a higher-than-stated dividend in profitable years Define Adjustable Rate - CORRECT ANSWER Dividend is tied to industry benchmarks such as the yield of Treasury Bills Under Rule 144, how long must a restricted security be held before it can be sold? - CORRECT ANSWER 6 months An investor is long 1 XYZ May 40 call and XYZ stock has a current market value of 44. Which of the following is TRUE? a. The May 40 call is at the money b. The May 40 call is in the money c. The May 40 call is out of the money d. The May 40 call has no intrinsic value - CORRECT ANSWER b. The May 40 call is in the money d. BE is calculated using the same formula for both buyer and seller - CORRECT ANSWER c. the maximum gain for options buyers is always unlimited Listed options transactions settle regular way a. on the third Friday of the expiration month b. on the next business day after trade date (t + 1) c. on the third business day after trade date (t + 3) d. when the option finally expires - CORRECT ANSWER b. on the next business day after trade date (T + 1) Regarding assignment of exercises notices, which of the following are TRUE? I. The Options Clearing Corporation (OCC) assigns short BD's randomly II. The OCC assigns short BD's using the first in, first out (FIFO) accounting method III. Short BD's can assign their short customers randomly only IV. Short BD's can assign their short customers randomly, using the FIFO accounting method or by any other fair method. - CORRECT ANSWER The OCC assigns short BDs using the first in, first out (FIFO) accounting method Short BDs can assign their short customers randomly. using the FIFO accounting method or by any other fair method A customer of a BD is opening a new options account. The customer must return the options agreement - CORRECT ANSWER Signed and not later than 15 days after the account approval An investor purchases 100 shares of XYZ stock at 67 and writes 1 covered call for a premium of $2.25 each. What is the investor's breakeven point? - CORRECT ANSWER $64.75 BE: 67 - 2.25 = 64.75 All of the following could be found in the money market EXCEPT: a. T-bonds maturing in 12 months b. T-bills c. Commercial paper d. Equities such as common and preferred shares - CORRECT ANSWER d. Equities such as common and preferred shares The most common type of direct participation program (DPP) in the securities industry is: - CORRECT ANSWER a limited partnership (LP) All of the following are benefits for the limited partners in a direct participation program (DPP) EXCEPT: a. Passive losses b. Flow-through of income c. Unlimited liability D. An investment managed by the general partner (GP) - CORRECT ANSWER c. unlimited liability A pooled investment which is organized as a trust in which investors buy shares or certificates of beneficial interest, either on stock exchanges or in the over-the- counter market, is - CORRECT ANSWER a real estate investment trust (REIT) An open-end management company may charge what amount annually and still advertise itself as a no-load fund? - CORRECT ANSWER .25% All of the following are true for exchange-traded funds (ETFs) EXCEPT A. ETFs can be bought or sold throughout the trading day B. ETFs are not marginal securities C. ETF share prices are subject to market forces like supply and demand D. ETF transactions are commissionable trades - CORRECT ANSWER B. ETFs are not marginal securities An investment established by states to provide other government entities such as cities or counties a place to invest funds short term is: - CORRECT ANSWER an LGIP Regarding annuity products offered by insurance companies, which of the following is TRUE? a. Variable annuities are securities; fixed annuities are not b. Fixed annuities are securities; variable annuities are not c. Neither variable nor fixed annuities are securities d. Both variable and fixed annuities are securities - CORRECT ANSWER Variable annuities are securities; fixed annuities are not A private, unregulated investment company organized in such a way so as to invest and achieve high returns utilizing debt leverage and derivative products such as options and margin is best described as: - CORRECT ANSWER a hedge fund An investor has placed money in a debt-like instrument issued by a financial institution and linked to the performance of the S&P 500 Index. From the investment which has a stated maturity date but makes no interest payments, the investor anticipates receiving a cash payment minus any applicable management fees when the instrument matures. This describes which of the following investments? - CORRECT ANSWER Exchange-traded note (ETN) One of the advantages of a security being traded on a listed stock exchange is the ready availability of buyers and sellers. This has the tendency to reduce or even eliminate: - CORRECT ANSWER liquidity risk Before making an investment, it is wise to evaluate the potential risk involved. It is safe to assume that (holding period is less than one year, therefore, the gain is short term and is taxed at same rate as taxpayer's other ordinary income.) A customer has returned a signed proxy statement for stock held in street name by a member firm. He did not indicate how he wanted to vote for any issues listed on his ballot. What action, if any, is required of the member firm? - CORRECT ANSWER The firm must vote in accordance with the recommendations made by the issuer of the stock Which of the following securities will settle regular way, T + 1? a. Corporate bond b. Revenue bond C. Treasury bond D. GNMA - CORRECT ANSWER C. Treasury bond An individual opens an account with your firm. She tells you that upon her death, she wants any assets in the account to be divided equally among her 3 children. She also wants the ability to change the allovation in the event that conditions change and one of the children is in greater need than the others, but she does not want to incur any significant legal expense. You would suggest that the account be opened A. as a joint account with the right of survivorship B. as a joint account with tenants in common C. as an individual transfer on death (TOD) account D. under a discretionary power - CORRECT ANSWER C. as an individual transfer on death (TOD) account If 3 individuals have a tenants in common (TIC) account with your firm and one individual dies, then - CORRECT ANSWER the 2 survivors continue as co-tenants with the decedent's estate A wealthy individual has established a trust and wishes to establish an account with your BD that permits the trust to engage in margin transactions. Which of the following statements regarding margin trading in trust accounts is TRUE? a. it is not permitted b. it is permitted if the trustee observes the prudent investor rule c. it is permitted with the written approval of the beneficiary of the trust d. it is permitted if provided for in the trust's documentation - CORRECT ANSWER d. it is permitted if provided for in the trust's documentation (margin trading is not a common practice, however, margin trading in a trust account is permitted if it is specifically provided for in the trust agreement) A client of a brokerage firm opened an UTMA account for her granddaughter 5 years ago, naming the child's father as the custodian. Through appreciation as well as additional contributions, the account value has grown to $50,000 and generates interest and dividend income in excess of $3,000. Who bears the liability for the taxes on his income? a. the donor b. the custodian c. the granddaughter d. no one, because there are no taxes on an UTMA account until the beneficiary takes possession of the account. - CORRECT ANSWER c. the granddaughter (the tax liability is that of the beneficiary of the account, the minor.) All of the following would be legal investments in an IRA EXCEPT: a. annuities issued by the ABC Life Insurance Company b. whole life insurance issued by the ABC Life Insurance Company c. mutual funds d. gold coins made by the U.S. Treasury - CORRECT ANSWER b. whole life insurance issued by the ABC Life Insurance Company (any form of life insurance is a prohibited investment in an IRA, however, another insurance company product, an annuity, is permitted) Which of the following is NOT true for trade confirmations? a. Commissions are added to the sales proceeds to arrive at the amount the seller is to receive b. Commissions are not shown when a markup or markdown is charged c. The firms acting capacity as agent or principal is shown d. They are received by both parties at or before the settlement date - CORRECT ANSWER a. Commissions are added to the sales proceeds to arrive at the amount the seller is to receive One of the concerns of a registered representative (RR) is complying with the anti- money laundering (AML) rules promulgated under the Bank Secrecy Act. There are several stages to money laundering, and it is generally agreed that the one where money laundering is most easily detected is: - CORRECT ANSWER Placement How long must a BD hold the record of a complaint? - CORRECT ANSWER 4 years Account statements provided to customers would reflect I. year-to-date activity in the account II. long positions, short positions, or both III. whether the account was discretionary or non-discretionary Regarding a member firm's continuing payment of commissions to a retired registered representative, each of the following statements are true EXCEPT: a. an agreement to pay continuing commissions to retired RRs must be in writing b. commissions may be paid to a representative's beneficiary or estate after death c. a member firm may pay continuing commissions to its retired RRs that are derived from accounts held for continuing customers, regardless of whether customer funds or securities are added to the accounts during retirement d. a retired RR may receive commissions derived from new customers to the book - CORRECT ANSWER c. a member firm may pay continuing commissions to its retired RRs that are derived from accounts held for continuing customers, regardless of whether customer funds or securities are added to the accounts during retirement A joint trading account can be created and profits and losses shared between which of the following parties? a. BD (firm) and retail customer, but only if sharing is in proportion to the investment b. BD (firm) and institutional client, but only if sharing is in proportion to the investment c. RR and neighbor with principal approval, and only the customer has contributed to the account d. RR and mother-in-law, and only the mother-in-law has contributed to the account - CORRECT ANSWER d. RR and mother-in-law, and only the mother-in-law has contributed to the account FINRA membership eligibility standards are determined by - CORRECT ANSWER The National Adjudicatory Council (NAC) An individual applying for registration as an associated person will be rejected if he a. submitted an application for registration which omitted mention of a minor traffic violation that occurred two years ago b. failed to include the ZIP code on his home address c. is under a court injunction regarding a domestic issue d. is under an order of a foreign financial regulator denying, suspending, or revoking his registration or barring him from association with a BD - CORRECT ANSWER d. is under an order of a foreign regulator denying, suspending, or revoking his registration or barring him from association with a BD As a means of protecting the integrity of the industry and protection of the investing public, associated persons of FINRA member firms must submit fingerprint records to: - CORRECT ANSWER The U.S. Attorney General If a registered representative (RR) has been barred from the securities industry while working for the ABC broker-dealer (BD), which of the following is TRUE? a. the RR must refrain from engaging with the public on any securities-related activity for one year b. the RR may apply for and obtain a principal's registration, but may not engage any direct sales of securities until the bar has expired c. the RR can be an adviser to a BD but may not be registered with a BD d. the RR may not associate with any BD - CORRECT ANSWER d. the RR may not associate with any BD The receptionist at a BD opens all incoming mail and forwards to various departments and people of the firm. Which of the following statements is true? I. the receptionist must be fingerprinted II. the receptionist need not be fingerprinted III. the receptionist must be registered with FINRA IV. the receptionist need not be registered with FINRA - CORRECT ANSWER the receptionist must be fingerprinted the receptionist need not be registered with FINRA Which of the following is CORRECT regarding the continuing education regulatory element requirements? a. training must be completed within 120 days of the person's second registration anniversary and every 5 years thereafter b. training must be completed within 120 days of the person's first registration anniversary and then annually thereafter c. training must be completed within 120 days of the person's second registration anniversary and every 3 years thereafter d. training must be completed annually - CORRECT ANSWER c. training must be completed within 120 days of the person's second registration anniversary and every 3 years thereafter The continuing education firm element requires member firms to prepare in- house training for all registered persons: - CORRECT ANSWER annually FINRA describes 4 sets of rules and codes in its manual. Which of the following is NOT one of them? a. Code of Arbitration Procedure b. Uniform Practice Code Automatic exercise will occur at expiration for any equity option contract that is in the money by at least: - CORRECT ANSWER 0.01 An investor is long a January 30 call at 2. Breakeven is: - CORRECT ANSWER 32 Premium (2) + Strike Price (30) 2 + 30 = 32 An amended Form U-5 must be filed and a copy sent to the former employee within how many days of discovery of the inaccuracy? - CORRECT ANSWER 30 days Limited partnership programs are categorized as direct participation programs. The term direct participation refers to the - CORRECT ANSWER flow-through of profits and losses of the partnership to the individual limited partners As long as it is not restricted in any documentation, margin trading is permissible in which of the following accounts? I. Corporate II. IRA III. Partnership IV. Fiduciary - CORRECT ANSWER Corporate & Partnership Regarding primary offerings, which of the following is TRUE? a. there is no limit to the number of primary offerings a corporation can issue b. after its IPO, a corporation can have only one more primary offering - its subsequent primary offering (SPO) c. a corporation can have only one primary offering - the IPO d. a corporation can have two primary offerings - the IPO and an additional public offering (APO) - CORRECT ANSWER a. there is no limit to the number of primary offerings a corporation can issue A diversified fund charging 0.4% of net assets per year as a 12b-1 fee may NOT make which of the following statements? a. the fund will pay its investment adviser a specified percentage of funds under management b. the fund will have a calculated fully disclosed expense ratio c. the fund will have a diversified portfolio with a stated investment objective d. the fund is a no-load fund - CORRECT ANSWER d. the fund is a no-load fund A customer has a short-term investment time horizon and a fairly certain need for funds she wishes to invest. Which of the following might meet those 2 investment objectives? a. common stock b. corporate bonds c. money market instruments d. government bonds - CORRECT ANSWER c. money market instruments Tax credits for partners in a real estate program can come primarily from - CORRECT ANSWER government-assisted housing and historic rehabilitation properties An officer of a financial firm has been identified what might represent suspicious behavior on the part of a customer, involving more than $5,000. When must the firm file a suspicious activity report (SAR)? - CORRECT ANSWER Within 30 calendar days Each of the following makes regular interest payments EXCEPT a. treasury STRIPS b. corporate bonds c. treasury bonds d. treasury notes - CORRECT ANSWER Treasury STRIPS Treasury STRIPS have the coupons removed and therefore do not make regular interest payments. A market maker provides a firm quote to another broker/dealer then refuses to buy or sell at the price quoted. This is a violation where the market maker is said to be - CORRECT ANSWER backing away Rule 144 imposes volume limitations on the number of shares that can be sold by I. control persons selling registered stock held for 1 year II. control persons selling restricted stock held for 2 years III. non-affiliates selling registered stock held for 1 month IV. non-affiliates selling restricted stock held for more than 6 months - CORRECT ANSWER Control persons selling registered stock held for 1 year & Control persons selling restricted stock held for 2 years An investor establishes the following position: Long 1 XYZ September 40 call at 2. Utilizing this position, the maximum potential gain for the investor is: - CORRECT ANSWER unlimited Long calls are bullish positions A corporate stock is purchased on Friday, April 2, regular way. When will the trade settle? - CORRECT ANSWER Tuesday, April 6 Regular way settlement is the trade date (Fri, April 2) plus two business days; therefore, the trade will settle on Tuesday, April 6 d. a foreign nonmember firm ineligible for FINRA membership - CORRECT ANSWER b. a suspended broker who recommends the broker's firm for a transaction A select pair or group of companies organized to underwrite corporate or municipal securities is BEST known as a(n) - CORRECT ANSWER syndicate A stock trade took place on Tuesday, July 2. When would regular way settlement normally take place? a. Tuesday July 2 b. Wednesday July 3 c. Monday July 8 d. Friday July 5 - CORRECT ANSWER d. Friday, July 5 Regular way settlement for a trade is T + 2 (Trade date + 2 business days) (Also, July 4th is a National Holiday so it can't be transacted then) Which of the following would be considered earned income? a. dividends received from a stock dividend b. interest received from a bond investment c. the premium kept from an unexercised short put d. bonus received from employment - CORRECT ANSWER d. bonus received from employment Listed options expire on: - CORRECT ANSWER the 3rd Friday of the expiration month A 72-year old customer has a $30,000 RMD calculated to be taken from an IR if the customer is in the 20% income tax bracket and only withdraws $25,000 from the account, how much tax will be owed? - CORRECT ANSWER $7,500 Failure to meet RMD results in 50% penalty tax on the shortfall. Taking only 25k when 30k should have been taken leaves 5k exposed to 50% penalty tax. $5,000 x 50% = 2,500. 2,500 + 5,000 = 7,500 The coupon rate on a debt security represents - CORRECT ANSWER the interest rate the issuer has agreed to pay the investor An associated person of a FINRA member firm would not be considered a municipal finance professional (MFP) if involved solely in which of the following? a. municipal securities sales to customers b. underwriting municipal securities for the firm c. research involving municipal securities for the firm d. municipal securities communications with customers - CORRECT ANSWER c. research involving municipal securities for the firm During the cooling-off period, underwriters may NOT - CORRECT ANSWER distribute sales literature or advertising material Which of the following choices would BEST describe a "follow-on" offering? a. the common stock that is issued attached to a 'rights' offering b. an issue of shares by a public company that is already listed on an exchange c. an offering to the employees of the issuing company d. an IPO that has additional shares added by the issuer on the effective date - CORRECT ANSWER b. an issue of shares by a public company that is already listed on an exchange Which of the following would be defined as a penny stock? I. Nasdaq listed stock trading at $4 per share II. Bulletin Board stock trading at $4 per share III. Exchange Listed stock trading at $4 per share IV. OTC Pink stock trading at $4 per share - CORRECT ANSWER Bulletin Board & OTC Pink A penny-stock is a NON-NASDAQ stock trading under $5 per share. Which of the following choices would BEST describe a "follow-on" offering? a. The common stock that is issued attached to a "rights" offering b. An issue of shares by a public company that is already listed on an exchange c. An offering to the employees of the issuing company d. An IPO that has additional shares added by the issuer on the effective date - CORRECT ANSWER b. An issue of shares by a public company that is already listed on an exchange An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place? - CORRECT ANSWER Rights will be distributed to existing stockholders with an exercise price lower than the current market value A broker-dealer is confronted with margin deposit due but not yet received. The BD can choose to take no action, neither selling out the securities nor requesting an extension, if the amount due is: - CORRECT ANSWER Less than $1,000 Which of the following is TRUE when opening an out-of-state Section 529 plan? a. The student may not use it in the donor's state of residence b. Earnings do not accumulate tax deferred c. Withdrawals may not be free of federal taxation d. Withdrawals may not be free of state taxation - CORRECT ANSWER d. Withdrawals may not be free of state taxation Mutual funds that market directly to the public, using no underwriter and charging no sales charge, are called: - CORRECT ANSWER no-load funds b. Interest and principal payment is backed by the full faith and credit of the issuer c. Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service revenue d. The bonds carry an unqualified promise to pay interest and principal backed by the power of the issuer to levy taxes - CORRECT ANSWER c. Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. Treasury bills pay - CORRECT ANSWER all interest at maturity Yield to call (YTC) calculations reflect the early redemption date and: I. acceleration of the discount gain if the bond was originally purchased at a premium II. acceleration of the discount gain if the bond was originally purchased at a discount III. accelerated premium loss if the bond was originally purchased at a premium IV. accelerated premium loss if the bond was originally purchased at a discount - CORRECT ANSWER Accelerated of the discount gain if the bond was originally purchased at a discount & Accelerated premium loss if the bond was originally purchased at a discount List the order of payment from first to last in the event of a corporate liquidation: - CORRECT ANSWER 1. Taxes and wages 2. Secured and then unsecured debt 3. Preferred shareholders 4. Common shareholders Which of the following would NOT be considered ordinary income for tax purposes? a. rents and income properties b. gains gotten from the sale of securities c. salary and commissions d. dividends on common stock - CORRECT ANSWER b. gains gotten from the sale of securities For primary and secondary markets, which of the following is TRUE? a. in the primary market, securities are sold to the public and the issuer receives the sale proceeds b. in the primary market, securities are purchased from and sold to individual investors c. in the secondary market, securities transactions cannot take place on an exchange d. in the secondary market, all sales proceeds go to the issuer - CORRECT ANSWER a. in the primary market, securities are sold to the public and the issuer receives the sale proceeds The buyer of an option contract can be known as all of the following EXCEPT: a. owner b. writer c. holder d. long party - CORRECT ANSWER b. writer Common shareholders have the right to - CORRECT ANSWER limited access to a company's books and records Put buyers are - CORRECT ANSWER bearish Mr. Smith enters a trade in a stock at the same time as Mr. Jones, who has inside information regarding that company, Mr. Smith is considered - CORRECT ANSWER a contemporaneous trader Examples of investments in assets that would be considered illiquid would be all of the following EXCEPT: a. real estate b. common stock c. classic automobiles d. works of art - CORRECT ANSWER b. common stock A convertible feature for a corporate bond allows - CORRECT ANSWER a bondholder to convert a debt instrument into securities that give the investor ownership rights If large money center commercial banks begin to lower their prime rates, which of the following is most likely to occur? a. smaller banks will follow by lowering the discount rate b. smaller banks will need to increase their lending rates for creditworthy corporate customers c. smaller banks will need to offset the lower prime rate by increasing the broker call loan rate d. smaller banks - CORRECT ANSWER d. smaller banks will lower lending rates for creditworthy corporate customers as well. a. payable b. declaration c. ex-dividend d. record - CORRECT ANSWER c. ex-dividend A corporation has issued debt securities backed by the shares of another corporation that it owns. These debt securities are known as: - CORRECT ANSWER collateral trust bonds As they apply to knowing your customer and making recommendations which of the following statements are TRUE statements? - CORRECT ANSWER The term investment strategy applies to recommendations to buy, hold and sell & Non-financial considerations such as marital status and age should be considered as well as financial considerations when making recommendations Ownership of a security indicates that one is: - CORRECT ANSWER long the position and bullish BDs who reserve the right to disclose nonpublic private information about their customers to unaffiliated parties must: - CORRECT ANSWER provide notice to customers at the time of the account opening and provide reasonable means for customers to opt out of such disclosures. An example of securities that are established by states to provide other government entities such as cities, towns, school districts or state agencies with a short-term investment vehicle to invest funds include: - CORRECT ANSWER Local Government Investment Pools Identify 2 trading strategies that a hedge fund could employ in its portfolio but a mutual fund cannot - CORRECT ANSWER 1. Trading on margin to purchase portfolio securities 2. Selling short stocks If a margin deposit is late, an extension request made by the BD - CORRECT ANSWER is not required but can be made, and may or may not be granted A customer buys a 4% Treasury bond, maturing in 10 years, at a price of 96.08. The yield to maturity is - CORRECT ANSWER greater than nominal yield A bond whose price is below par (priced at a discount) has a higher YTM than current yield An investor has been putting aside funds for retirement in a non-qualified variable annuity for over five years. She is now age 66 and takes a lump-sum distribution. How are the earnings taxed? - CORRECT ANSWER as ordinary income The regulatory element of training requires that all registered persons complete a computer-based training session how frequently? - CORRECT ANSWER Within 120 days of hte person's second registration anniversary and then every 3 years thereafter Bonds can typically be issued with - CORRECT ANSWER term, serial, or balloon maturities The growth potential in the price of preferred shares is generally considered to be - CORRECT ANSWER less than that of the issuer's common shares An individual would most likely be statutorily disqualified from working the in the securities industry for which of the following reasons? a. Willful failure to disclose personal bankruptcy or unsatisfied liens b. Willful failure to disclose motor vehicle fines in excess of $1,000 c. Conviction for a DUI resulting in personal injury - a felony d. Conviction for felonious assault - CORRECT ANSWER a. Willful failure to disclose personal bankruptcy or unsatisfied liens A call option reaches its expiration date and goes unexercised. This means - CORRECT ANSWER the buyer loses the premium paid & the writer gains the premium received A toy company is experience sudden strong demand for a game. Purchasing this company's stock may prove profitable in the short run. This company's stock might BEST be termed as a - CORRECT ANSWER Special situation Listed options expire on - CORRECT ANSWER the 3rd Friday of the expiration month The Uniform Securities Act (USA) provides a legal framework for the registration of - CORRECT ANSWER securities at the state level SKRAM corporation is appealing directly to the shareholders of IDNIC corporation to acquire shares of IDNIC stock. This appeal is best described as: - CORRECT ANSWER a hostile takeover with IDNIC the target company U.S. government deposits securities with a trustee against which certificates are sold representing principal only with no regular interest payments. These are known as: - CORRECT ANSWER Treasury STRIPS When a firm engages in proprietary trading, buying into and selling out of its own inventory for profit, it is acting as - CORRECT ANSWER a market maker Sales for new issues of securities may be solicited - CORRECT ANSWER after the cooling-off period With money market securities held in one's portfolio, relative to other, longer- term debt securities, an investor should expect - CORRECT ANSWER a higher degree of safety with lower returns Because of their short-term maturities, money market securities are considered highly liquid and provide a relatively high degree of safety. a. this can be accomplished by utilizing a new IPO, which is necessary for registration of all new shares b. this cannot be done because newly registered securities must be made available for sale immediately c. this can be accomplished by utilizing a shelf registration specifically designed to register shares presently to be sold later d. this can be accomplished by utilizing an additional issue offering, which is specifically for publicly traded companies wanting to register new shares to be issued later - CORRECT ANSWER c. this can be accomplished by utilizing a shelf registration specifically designed to register shares presently to be sold later. Which of the following are TRUE of municipal revenue bonds? I. They are secured by a specific pledge of property II. They are a type of general obligation bond III. They are not subject to statutory debt limits IV. They are backed by a facilities ability to generate revenue - CORRECT ANSWER They are not subject to statutory debt limits & They are backed by a facilities ability to generate revenue Regarding capital gains, which of the following is TRUE? - CORRECT ANSWER Short-term gains are those realized on positions held for 12 months or less Common shareholders have the right to: - CORRECT ANSWER limited access to a company's books and records Fingerprint records are required for each of the following employees of a registered broker-dealer EXCEPT: a. a registered representative who sells or offers to sell municipal or government bonds b. those whose duties are limited to supervising clerks who handle the books and records of the firm c. a receptionist greeting customers and directing to the appropriate RR within the office d. a clerk who handles customer physical securities - CORRECT ANSWER c. a receptionist greeting customers and directing them to the appropriate registered representative within the office Which of the following records must be maintained for 6 years? - CORRECT ANSWER Customer ledgers (statements) In a proxy contest, which of the following must register with the SEC? - CORRECT ANSWER All persons participating in proxy solicitation All persons providing shareholders with unsolicited advice Regarding transferability for common shares, which of the following is TRUE? - CORRECT ANSWER Shares can be sold or given away without the permission of the corporation An investor purchased 100 shares of Acme Shoelace stock for $20 per share. Four years later, the investor sold the stock for $28 per share. This investor would report these transactions, on a per share basis, as - CORRECT ANSWER $20 cost base, $8 capital gain Regarding the decision to dissolve a LP (limited partnership) before its scheduled predetermined dissolution date, it would need to be - CORRECT ANSWER voted on by the limited partners holding a majority interest An investor owning 500 shares of MES stock received notice that the stock had undergone a 2:1 forward split when the stock's market price was $10 per share. The investor now owns - CORRECT ANSWER 1,000 shares worth $5 per share All of the following are true for 529 plans EXCEPT: a. plan donors must be related to the student benefactor b. contributions to the plan are considered gifts for tax purposes c. withdrawals would be tax free at the federal level if used for qualified education expenses d. any adult can open a 529 plan for a student - CORRECT ANSWER a. plan donors must be related to the student benefactor What happens to the contents of a custodial account in the event of the death of the beneficial owner (the minor child)? - CORRECT ANSWER The custodian's fiduciary responsibility ceases & The account passes to the minor's estate FINRA is concerned about potential conflicts of interest in providing incentives or rewards for selling a sponsor's product. Which of the following situations regarding a product sponsors product training or education for outside RRs would FINRA disallow? a. Spouses are included in the invitation with travel expenses paid for b. a member firm's permission for its RRs to attend is required c. Separate outings are planned in conjunction with the training at the expense of the attendees if they wish to participate A new customer tells you that her objective is to incur little risk because she is anticipating a new home within the next 12 months. Which of the following would be a suitable recommendation? - CORRECT ANSWER T-bills Investor's timeframe for needing the funds (within 12 months) and low-risk objective are the key factors to consider. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. T-bills are the shortest fixed term and are issued by the U.S. government, entailing little to no risk Typically, a corporation would NOT issue a. common stock b. debentures c. preferred stock d. option contracts - CORRECT ANSWER d. option contracts Priority at dissolution for preferred shareholders means that they are paid: - CORRECT ANSWER After all creditors & Before common sareholders Regarding a corporate bankruptcy and the liquidation priority, which of the following is accurate? - CORRECT ANSWER Debt securities claims are satisfied before equity securities claims All of the following SROs function under the SEC's oversight EXCEPT: a. CBOE b. FSLIC c. MSRB d. FINRA - CORRECT ANSWER b. FSLIC Selling shares not yet borrowed or located to be borrowed is: - CORRECT ANSWER known as naked short sale and is prohibited All of the following are issuer transactions where the proceeds of the offering go to the issuing company EXCEPT: a. IPO b. REPO c. SPO d. APO - CORRECT ANSWER b. REPO All of the following are terms that can be used to describe an option contracts strike price relative to the price of the underlying stock EXCEPT: a. in the money b. at the money c. out of the money d. above the money - CORRECT ANSWER d. above the money Which of the following would constitute improper use of a customer's securities or funds? I. agreeing to a stock purchase the representative thinks is beyond the client's means II. selling a bond at the client's insistence during a period of high interest rates III. lending securities for a short sale when the client has agreed to it on the phone IV. borrowing a client's funds without permission, though it will be repaid the same day - CORRECT ANSWER Lending securities for a short sale when the client has agreed to it on the phone & Borrowing a client's funds without permission, though it will be repaid the same day For the risk disclosures found in the options disclosure document (ODD), all of the following would be accurate disclosures EXCEPT: a. customers are not entitled to an extension of time to meet a margin call b. firms can increase their in-house margin requirements without advance notice c. customers can lose more money than initially deposited d. if a maintenance call is not met, the customer must direct which securities to sell - CORRECT ANSWER d. if a maintenance call is not met, the customer must direct which securities to sell An investor purchases a bond in the secondary market at $950. Assuming $1,000 par value, this bond is trading at: - CORRECT ANSWER a discount When a bank lends money to a BD for the purpose of lending to margin account customers, the bank is lending at which of the following rates? - CORRECT ANSWER Broker call loan A RR has left one firm to join another. Sometime later, the former employer discovers that some information on Form U-5 filed at the time of termination was inaccurate. The firm need not file an amended U-5 if at least how much time has gone by? - CORRECT ANSWER No stated time limit It must be sent out within 30 days of discovery of the inaccuracy however Which of the following corporate bonds is backed by the securities of other corporations or those of a subsidiary? - CORRECT ANSWER Collateral trust bond A decline in the GDP must last for at least how many quarters to be considered a recession? - CORRECT ANSWER 2 quarters The owner of which of the following products is most exposed to inflationary risk a. utility stocks b. treasury bills c. treasury bonds d. blue chip industrials - CORRECT ANSWER c. treasury bonds c. political d. nonsystematic - CORRECT ANSWER d. nonsystematic Which of the following comparisons BEST describes the essential difference between a primary distribution and a secondary distribution? - CORRECT ANSWER a primary distribution involves a sale of newly issued shares by the issuer while a secondary distribution involves the sale of already issued and outstanding shares At the time of issuance, which of the following securities normally has the longest period to expiration? a. rights b. options c. warrants d. repurchase agreements - CORRECT ANSWER c. warrants Under SEC Regulation S-P (Consumer Privacy), which of the following information must a firm include in its customer privacy and opt-out notices? - CORRECT ANSWER The policies to protect the security of nonpublic information Which of the following actions is required when a firm receives cash in excess of $10,000 from one customer in one business day? - CORRECT ANSWER File a Currency Transaction Report (CTR) An investor owns 100 shares of XYZ common stock at the current market price of $50 per share. If XYZ conducts a 1-for-2 reverse stock split, the investor's post- split stock position will be: - CORRECT ANSWER 50 shares at $100 per share 100 shares at $50 each before the reverse split Which of the following communications with the public is considered misleading? a. historical illustration based on factual performance b. product comparisons that illustrate material differences c. a research report that includes a buy recommendation for a specific security d. literature providing 10-year performance information to support predictions of future performance - CORRECT ANSWER d. literature providing 10-year performance information to support predictions of future performance Which of the following considerations should a RR explain to a customer when recommending a 529 college savings plan? - CORRECT ANSWER the potential deductibility of contributions from state taxes A BD is permitted to accept payment for a new issue from a new customer when the: - CORRECT ANSWER registration is effective The call provision of a bond stipulates which of the following factors? - CORRECT ANSWER call date and call price A firm is participating in a public offering. To sell a substantial amount of the securities to its customers, the firm agrees to repurchase the shares at no less than the original sales price. Such agreements are: - CORRECT ANSWER prohibited as fraudulent and manipulative Blue-sky laws are regulated by which of the following entities? - CORRECT ANSWER State securities regulators All of the following risks apply to both foreign and domestic debt instruments EXCEPT: a. political b. exchange c. repayment d. interest rate - CORRECT ANSWER b. exchange Under industry regulations, an initial purchase of $3,000 of common stock in a margin account requires a cash deposit of: a. $750 b. $1,500 c. $2,000 d. $3,000 - CORRECT ANSWER c. $2,000 Regular way settlement on Treasury bonds is: - CORRECT ANSWER next business day The last transaction in XYZ 5.50s 2030 was at 102. This bond is selling at: - CORRECT ANSWER a premium A company announces a tender offer to its shareholders with the intent to buy a maximum of 1 million shares of its outstanding stock at $10 per share and sets no minimum number of shares to be purchased. An investor wants to participate in this offer and tenders his 1,000 share position. At the close of the offer period, only 900,000 shares have been tendered. How many, if any, of the investor's shares will the company purchase? - CORRECT ANSWER 1,000 The redemption value of an open-end investment company's shares is based on the: - CORRECT ANSWER NAV (net asset value) computed after the order is received Company ABC announces a 20% stock dividend for its common shareholders. If a customer holds 1,000 shares at $50.00, what is the new price and number of shares following the payment of the stock dividend? - CORRECT ANSWER 1,200 shares at $41.67 A member of a stock exchange responsible for providing liquidity in a security by being willing to buy and sell at all times is known as: - CORRECT ANSWER a market maker A savings account at a bank is guaranteed by which of the following entities? - CORRECT ANSWER FDIC A transaction in which a writer covers a position by purchasing an option is called: - CORRECT ANSWER a closing purchase Which of the following represents the effect of a stock split? - CORRECT ANSWER The price per share of common stock decreases Under FINRA rules, noncash compensation connected with the sale of variable contracts includes all of the following items EXCEPT: a. gifts b. meals c. lodging d. commissions - CORRECT ANSWER d. commissions When a BD charges a commission on a securities transaction, it has acted as: - CORRECT ANSWER an agent At issue, which of the following debt securities mature in one year or less? a. FNMA bonds b. GNMA bonds c. Treasury notes d. Money market instruments - CORRECT ANSWER d. Money market instruments A RR wants to participate in a private securities transaction. Which of the following actions must the RR take? - CORRECT ANSWER send written notice to his supervisor outlining the activity and compensation structure In which of the following situations is an employee of a public company permitted to trade upon information without violating insider trading laws? - CORRECT ANSWER an independent securities analyst explains to the employee why the earnings for the company next quarter could be markedly poorer than expected Which of the following statements is true about all US government agency issues a. they are exempt from federal taxes b. they are exempt from registration under the Securities Act of 1933 c. They are issued in bearer form only d. They are general obligations of the federal government - CORRECT ANSWER b. they are exempt from registration under the Securities Act of 1933 Which of the following actions is required of a BDs anti-money laundering (AML) program? - CORRECT ANSWER Designating an AML compliance officer Which of the following outcomes are possible for the writer of a covered call option? - CORRECT ANSWER profit limited and loss limited In the event of a stock split, which of the following parties is required to maintain a record of the shareholders eligible to receive the additional shares? - CORRECT ANSWER transfer agent Under Federal Reserve Regulation T, a 90-day restriction is imposed when a customer opens and closes which of the following positions? - CORRECT ANSWER The same stock in a cash account without paying for the stock in full Which of the following responses describes an advantage of index funds? - CORRECT ANSWER Lower management fees due to passive management of the fund Under a system of statutory voting, a common stockholder has as many votes for each vacancy on the board of directors as the number of: - CORRECT ANSWER shares owned by the stockholder In a period of low inflation and economic recession, the Federal Reserve is expected to take which of the following actions? a. decrease taxes b. raise the fed funds rate c. buy bonds in the open market d. require banks to increase reserves - CORRECT ANSWER c. buy bonds in the open market When selling a fixed amount of a base currency to purchase a counter currency, which of the following factors is primarily used to determine how much of the counter currency the customer will receive? - CORRECT ANSWER the spot exchange rate Stability in the value of a debt portfolio is greatest when: - CORRECT ANSWER maturities of the debt securities are short No-load mutual funds may have lower expense ratios than load mutual funds for which of the following reasons? - CORRECT ANSWER No-load funds are not permitted to charge a 12b-1 fee greater than 25 basis points What is the cost basis of an inherited mutual fund? - CORRECT ANSWER The net asset value (NAV) of the shares when the owner dies In the over-the-counter market, the term 'spread' refers to the difference between the: - CORRECT ANSWER bid and asked prices Which of the following action violates FINRA rules regarding selling away? a. recommending to a customer the services of another broker-dealer b. sharing commissions with another RR in the same BD c. advising customers to buy mutual funds at amounts just below discount level d. engaging in private securities transactions without written prior consent of the employing BD - CORRECT ANSWER d. engaging in private securities transactions without written prior consent of the employing BD Under Rule 144A, an issuer of restricted stock is permitted to sell to which of the following investors: a. financial institutions b. accredited investors c. qualified institutional buyers (QIBs) d. non-accredited investors who have previously purchased restricted stock - CORRECT ANSWER c. qualified institutional buyers (QIBs) municipal bonds are exempt from registration under the Securities Act of 1933 Securities acquired through some means other than a registered public offering are known as: - CORRECT ANSWER restricted Which of the following securities is exempt from the Regulation T margin requirements but still subject to an initial margin requirement as determined by the broker-dealer? a. options b. t-notes c. rights d. mutual funds - CORRECT ANSWER b. t-notes while Treasury securities (bills, notes, and bonds) are exempt from Reg T margin requirements, purchases of them on margin are allowed and would be subject to the firm's determination of what the initial margin deposit requirement should be. Advantages to the investor offered by investment companies include: I. ability to invest small amounts in many different securities II. special securities prices available only to investment companies III. elimination of market risk through pooling of investments IV. increased purchasing power in the marketplace - CORRECT ANSWER ability to invest small amounts in many different securities & increased purchasing power in the marketplace A BD's business continuity plan to be enacted in the event of a significant business disruption requires all of the following EXCEPT: a. alternate physical location of employees if needed b. data backup and recovery (hardcopy and electronic) c. prompt customer access to funds and securities d. notification to regulators within 1 hour of the event - CORRECT ANSWER d. notification to regulators within 1 hour of the event What is one of the advantages for the investor who invests in mutual funds that include foreign securities in the fund's portfolio? - CORRECT ANSWER increased diversification Shares must be borrowed in order to: a. sell short to open a position b. buy to close a position c. buy to open a position d. sell short to close a position - CORRECT ANSWER d. sell short to close a position When selling short, an investor is OPENING a position (a short position). Selling short means SELLING SHARES NOT YET OWNED. A customer buys a 10% bond with a current yield of 12% and holds the bond until 1 year before maturity. The bond is sold when current interest rates are 8%. Which of the following statements are CORRECT? - CORRECT ANSWER The Bond was purchased at a discount, and sold at a premium When the current yield (12%) is higher than the coupon (10%), it means the bond was purchased at a discount. To meet a Regulation T margin call, a customer would have how long? - CORRECT ANSWER Settlement plus 2 additional business days. the rule requires that the call be met within 2 business days of the settlement date, referred to as S + 2. If regular way settlement was T + 2, adding 2 additional business days would be T + 4 An applicant who was unable to pass a FINRA qualification exam 3 times would need to wait how long before another attempt would be permitted? - CORRECT ANSWER 180 days A shareholder feels strongly about some of the issues to be voted on at the next shareholder meeting but is unable to attend. Which of the following is TRUE? - CORRECT ANSWER the shareholder can vote by proxy, online or by mail The price of a certain stock has diminished over the last several months to the point where it may be delisted by the exchange where it trades. An action the issuer could take in this case would be: - CORRECT ANSWER a reverse stock split Discretion given to a RR to make transactions applies to all of the following EXCEPT: a. whether to buy or sell b. the number of shares or units for the transaction c. the security for the transaction d. timing and price only - CORRECT ANSWER d. timing and price only discretion is defined as the authority to decide, what security, the number of shares or units, and whether to buy or sell. Tax credits for partners in a real estate program can come primarily from - CORRECT ANSWER government-assisted housing and historic rehabilitation properties Associated persons who wish to enter into a private securities transaction for which they will receive no compensation must: - CORRECT ANSWER provide prior written notice to their employer Economists refer to longer, more severe contractions in the economy as: Short-term purchases and sales of a mutual fund to take advantage of price fluctuation is known as: - CORRECT ANSWER market timing When the supply for money exceeds the demand: - CORRECT ANSWER interest rates fall, making consumer borrowing easier Accusations of FINRA Conduct Rule violations will heard and handled under the: - CORRECT ANSWER Code of Procedure (COP) For municipal debt issues, which of the following is TRUE? a. neither GO nor revenue municipal issues are backed by the municipality's good faith credit b. GO bonds are self-supporting, while revenue bonds are backed by the municipality's good faith and credit c. Revenue bonds are self-supporting, while GO bonds are backed by the municipality's good faith and credit d. Both revenue bonds and GO bonds are backed by the municipality's good faith and credit - CORRECT ANSWER c. Revenue bonds are self-supporting, while GO bonds are backed by the municipality's good faith and credit With CCD stock at 40, a September 45 call trading at 3 is out of the money by: - CORRECT ANSWER 5 points and has no intrinsic value When a calls strike price is higher than the underlying stocks value, the call contract is OUT OF THE MONEY. In this case, it is out of the money by 5 points (45 - 40). When a contract is out of the money, it has no intrinsic value. Economic reports show that there is a general rise in prices for consumer goods and a high unemployment rate occurring simultaneously. This combination can best be described as: - CORRECT ANSWER stagflation combo of inflation and high unemployment A customer buys an October 75 MMS put. MMS stock closes at 70. Which of the following is TRUE? a. the put is out of the money b. it has only premium value c. the put is at the money d. the put has intrinsic value - CORRECT ANSWER d. the put has intrinsic value When the CMV of the stock is below the strike price, puts are IN THE MONEY. Therefore, they have intrinsic value. In the money by 5 points (75 - 70) A customer has purchased $10,000 in U.S. Treasury bonds. These securities: - CORRECT ANSWER will have evidence of ownership recorded in book entry form Which of the following activities constitute pegging? - CORRECT ANSWER Multiple purchases a security during a down market to keep it from falling & Protecting a short call option from being exercised by placing sell orders during the day in the underlying stock A company's net worth belongs to its: - CORRECT ANSWER stockholders Failure to complete the regulatory element continuing education requirement within the allotted time period will result in: - CORRECT ANSWER the registration being deactivated until the requirements are met Which of the following is an example of an equity security? a. mortgage bonds b. preferred shares c. debentures d. equipment trust certificates - CORRECT ANSWER b. preferred shares both common and preferred shares are equity securities the other choices represent a debt instrument An expansion in the business cycle would be characterized by: - CORRECT ANSWER increasing consumer demand for goods and services, increasing industrial production, and rising stock markets and property values Interest on a 7% corporate bond would be paid to the investor as: - CORRECT ANSWER 2 semiannual checks for $35 each Interest on corporate bonds is paid TWICE PER YEAR, or semiannually. The president of a pharmaceutical company sells his stock in the company after learning that the Food and Drug Administration (FDA) is going to deny sales of a new drug that it was reviewing for the company. The registered representative that executes the order and knows of the denial informs a key client and recommends the client sell their stock in the pharmaceutical company. According to the Insider Trading and the Securities Fraud Enforcement Act of 1988, all of the following are guilty of insider trading EXCEPT - CORRECT ANSWER the FDA If the beneficiary of a custodian account dies, the securities in the account pass to the: a. parents b. minor's estate c. custodian's estate d. SIPC trustee's account - CORRECT ANSWER b. minor's estate Electronic delivery of documents requires all of the following EXCEPT: a. procedures to show that delivery took place as intended b. a recording of the customer verbally agreeing to such receipt c. procedures to deliver the information in paper form upon request taken as deductions that will shelter the income from the lease payments received Par value for a bond is also known as: - CORRECT ANSWER face value or the amount a bond will be redeemed for at maturity An investor owns a bond with a 3.5% nominal yield making semiannual interest payments. On each interest payable date, the investor can expect to receive how much? a. $175 b. $350 c. $17.50 d. $35 - CORRECT ANSWER c. $17.50 a bond with a nominal yield of 3.5% pays $35 in interest annually, (3.5% x $1,000), given that the bond makes semiannual interest payments, each of those payments would be in the amount of $17.50 With a discretionary account: - CORRECT ANSWER the customer may still enter orders The law that provides the legal framework for state registration of securities is the: - CORRECT ANSWER Uniform Securities Act If an associated person is disciplined for violating SEC rules and regulations, and is ultimately suspended by the SEC, the member firm where the person is affiliated must report the suspension to: a. the board of governors b. the Federal Reserve Board (FRB) c. the exchanges where the firm is a member d. the state securities office - CORRECT ANSWER c. the exchanges where the firm is a member A registered representative has left a firm and joined another. The new firm must obtain a copy of the Form U-5 filled out by the old firm. Where might the new firm obtain a copy of the form? I. From the new employee II. From the Securities and Exchange Commission III. From FINRA's Central Registration Depository IV. From the representative's former employer - CORRECT ANSWER From the new employee & From FINRA's Central Registration Depository Regarding a corporate bankruptcy and the liquidation priority, which of the following is accurate? - CORRECT ANSWER Debt securities claims are satisfied before equity securities claims A member firm is assigned an exercise notice by the Options Clearing Corporation. The member firm may assign the exercise notice to one of its short customers by any of the following methods EXCEPT: a. in any way that is fair and reasonable b. to the customer having the largest short position c. on a random-selection basis d. to the customer having the oldest short position - CORRECT ANSWER b. to the customer having the largest short position For revenue bonds issued by a state or municipality, which of the following is TRUE? - CORRECT ANSWER Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place? - CORRECT ANSWER Rights will be distributed to existing stockholders with an exercise price lower than the current market value Which of the following would be TRUE with regard to capital gains? I. If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer's ordinary income. II. If the asset is held for more than a year, the gain is considered to be a long- term and is taxed at a favorable long-term rate. III. Capital gains are usually associated with the distribution of dividends including stock splits. IV. Capital gains can be defined as the income earned from interest, wages, rents, royalties, and similar income streams. - CORRECT ANSWER If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer's ordinary income & If the asset is held for more than a year, the gain is considered to be a long-term and is taxed at a favorable long-term rate Once a dividend is initially declared by the board of directors, any future dividend payments - CORRECT ANSWER carry no guarantee of payment in any amount Which of the following are considered systematic risks - those that would impact all businesses? I. market risk II. inflation risk III. regulatory risk buyers want contracts to have intrinsic value, therefore, to be in the money. writers want the contracts to be either AT or OUT OF THE MONEY and therefore have no intrinsic value All of the following actions must be completed before a customer enters the first option order EXCEPT: a. approval by a branch office manager or registered options principal b. delivery of an OCC disclosure booklet c. completion of (signing of) the options agreement d. completion of the new account form - CORRECT ANSWER c. completion of (signing of) the options agreement customers do not have to sign the options agreement before entering an order FINRA requires that member firms provide at least how many names as emergency contacts as a part of their business continuity plan? - CORRECT ANSWER two Money market securities can be associated with which of the following characteristics? - CORRECT ANSWER Being highly liquid MMS have short-term maturities which means they are highly liquid and relatively safe. Voting rights are a privilege generally afforded to: - CORRECT ANSWER common shareholders ONLY A brokerage firm has accumulated a large holding in a little known company by purchasing several hundred thousand shares of the company's stock. The firm instructs its RRs to begin touting the stock to every one of its customers and to make cold calls to new potential customers as well. This is most likely a scheme known as: - CORRECT ANSWER pump and dump Securities regulations that are called blue-sky laws refer to those at: - CORRECT ANSWER the state level Efforts to push up the price of stock one owns by soliciting buy orders from customers so that the stock owned can be sold later at a higher price is a violation commonly known as: - CORRECT ANSWER pump and dump For a callable bond priced at a discount, - CORRECT ANSWER YTM will be lower than the YTC trading at a discount, YTC will be the highest possible yield If an investor is long an option contract and wishes to exercise the contract, the investor notifies the BD, who then notifies: - CORRECT ANSWER OCC An equity option call buyer has the right to: - CORRECT ANSWER purchase stock and therefore is bullish call buyers pay the premium for the right to purchase the stock at the strike price. Those who buy stock are bullish (anticipate that it will rise) Each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of: - CORRECT ANSWER 4% Bond pays 2 interest payments of $20 each annually. Total interest is $40. $40 / $1,000 = 4% Correspondent firms would be likely to have relationships with which of the following types of broker-dealers? - CORRECT ANSWER self-clearing a self-clearing (or carrying) firm holds funds and securities of the fully disclosed or introducing firm's customers and performs related functions, such as sending confirmations and statements for them. Your customer has one position in her account and it poses an unlimited loss potential. Which of the following is it? - CORRECT ANSWER Short call short calls are bearish. Wanting the stock to go down the risk that the stock price will rise and, in theory, can go to infinity. Short calls carry unlimited risk. A RR suggests a trade to a customer which the customer agrees is suitable given their investment objectives. The order is entered. This transaction is: - CORRECT ANSWER solicited and the order ticket must be marked solicited a transaction initiated by an agent or RR is known as a solicited transaction. Unsolicited are those initiated by the customer. Order tickets should always be marked solicited or unsolicited. An investor who is long LMN equity call option is: - CORRECT ANSWER bullish on LMN stock FINRA staff must submit new rules and await approval from which of the following regulatory bodies prior to becoming effective? - CORRECT ANSWER SEC During the cooling-off period, underwriters may NOT: a. place a tombstone advertisement b. distribute sales literature or advertising material c. take indications of interest d. distribute a preliminary prospectus - CORRECT ANSWER b. distribute sales literature or advertising material Generally before borrowing from or lending to a customer, a registered representative must advise the firm in writing and receive written permission. Which of the following would be an exception to the written notice and approval requirement? - CORRECT ANSWER The customer is an immediate family member of the RR there are two exceptions: 1. immediate family members III. The client purchases $252,000 worth of shares IV. The client purchases $96,000 worth of shares - CORRECT ANSWER The client purchases $48,000 worth of shares The client purchases $96,000 worth of shares breakpoints allow for lower sales charges at or above the designated points. Should a member firm or an associated person be found in violation of FINRA's Conduct Rules, a number of sanctions may be imposed. However, under the Code of Procedure, FINRA may NOT: - CORRECT ANSWER impose a prison sentence on the violator When investors open a position by going long the security, they can close the position by: - CORRECT ANSWER selling the security going long a security means that it was purchased. If a position was opened by purchasing the security, it would be closed by selling it An investor short a January 30 call at 4 has a maximum gain potential of: - CORRECT ANSWER 4 points or $400 max gain for any short option position (call or put) is the premium initially received when the contract was written. Rule 144 imposes volume limitations on the number of shares that can be sold by I. control persons selling registered stock held for 1 year II. control person selling restricted stock held for 2 years III. non-affiliates selling registered stock held for 1 month IV. nonaffiliates selling restricted stock held for more than 6 months - CORRECT ANSWER control person selling registered stock held for 1 year control persons selling restricted stock held for 2 years A corporate issuer of common stock has decided that it wants an agreement that its underwriter must either raise all of the capital needed or cancel the underwriting. To best accommodate this underwriting should be a(n): - CORRECT ANSWER all-or-none A bond with a 4.5% stated yield might make - CORRECT ANSWER annual interest payments of $45 semiannual interest payments of $22.50 Regarding open-end and closed-end investment companies, all of the following are true EXCEPT: a. both offer an unlimited number of shares in a continuous public offering b. both may avoid taxation by distributing all their net investment income to shareholders c. both may be either diversified or non-diversified portfolios d. both may offer numerous objectives to select from - CORRECT ANSWER a. both offer an unlimited number of shares in a continuous public offering they're unlimited in open-end companies. Closed end company has a fixed number and once the IPO is over, only way to acquire shares is in the secondary market. During the cooling-off period of a new registration filed with with the SEC - CORRECT ANSWER a red herring may be given to prospective investors All of the following are eligible to apply for FINRA membership EXCEPT: a. a penny stock dealer b. a municipal bond broker c. an investment broker d. a real estate broker - CORRECT ANSWER d. a real estate broker Regarding the purchase of new equity issues (IPOs), restricted persons may - CORRECT ANSWER not purchase shares of a new issue Your customer establishes the following position: Long 1 XYZ January 50 put at 2. You can correctly inform the customer that the maximum potential gain on the position is: a. $4,800 b. unlimited c. $5,200 d. $200 - CORRECT ANSWER a. $4,800 max gain for a long put is calculated by subtracting the premium from the strike price (50 - 2 = 48 per share) For tax purposes, investment income is: - CORRECT ANSWER taxed at either ordinary income tax or capital gains tax rates Which of the following would be least likely to directly impact a bonds yield: a. time to maturity b. number of bonds in the issue c. issuer's credit quality d. current interest rates - CORRECT ANSWER number of bonds in the issue A registered representative with discretionary authority has been doing two or three trades per week in her customer's discretionary account. The volume of transactions is not in keeping with the historic activity in the account and the trades don't all align very well with the account objectives. A principal noted that other than generating commissions, the trades seem to have little profit potential. This is likely a red flag for: - CORRECT ANSWER churning MAS Corporation has enjoyed an extremely profitable year. It has been determined that those owning the MAS 4% preferred, participating to 6% An applicant who was unable to pass a FINRA qualifications exam 3 times would need to wait how long before another attempt would be permitted? - CORRECT ANSWER 180 days For investors, changes made to the TAX CODE by the IRS are known as a form of - CORRECT ANSWER legislative risk The price of a certain stock has diminished over the last several months to the point where it may be delisted by the exchange where it trades. An action the issuer could take in this case would be - CORRECT ANSWER a reverse split When the money supply in the economy decreases, - CORRECT ANSWER interest rates go up, hence borrowing and spending for consumers is more difficult By virtue of a stocks listing for trading on a U.S. stock exchange, which of the following risks is reduced or even recognized as eliminated - CORRECT ANSWER Liquidity risk For each transaction, a customer must be sent or given a written confirmation of the trade at or before the completion of the transaction, the settlement date. Information on that trade confirmation would include I. the markup (markdown) charged on a principal transaction II. the commission charged on an agency transaction III. the number of bonds purchased in a bond trade Iv. the CUSIP number (if any) - CORRECT ANSWER the commission charged on an agency transaction & the CUSIP number (if any) For collateral trust bonds, all of the following are true EXCEPT a. securities backing the debt can be securities of either fully or partially owned subsidiaries b. these are unsecured debt securities c. a trust serves as a depository holding the securities to serve as collateral d. the issuer deposits securities it owns into a trust - CORRECT ANSWER b. these are unsecured debt securities A mutual fund's public offering price is $15.23. An investor who wishes to invest $1,000 in the fund will purchase how many shares? - CORRECT ANSWER 65.66 shares Mutual funds can issue fractional shares. take 1000 and divide it by 15.23 A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and was missed in the 2 previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay this customer per share first? - CORRECT ANSWER 24 If the company is going to pay a common stock dividend, it must pay preferred first, including all dividends in arrears (missed). There are $16 due in back dividends for the 2 years missed, in addition to $8 this year, for a total of $24 An investor bought a put option and, in time, the underlying security declined below the strike price of the put. The put would probably - CORRECT ANSWER be exercised This is exactly what most put option buyers are looking for. They want the stock to GO DOWN. An investor owning 500 shares of stock worth $40 per share receives notice that the stock will undergo a split. When the split is completed, the investor owns 400 shares of stock worth $50 per share. The split must have been - CORRECT ANSWER a reverse split & an uneven split Split reduced number of shares, which makes it a reverse split. Money Market instruments can be associated with all of the following EXCEPT: a. highly liquid debt instruments b. high-yielding debt instruments c. short-term debt instruments d. nonvolatile and safe debt-instruments - CORRECT ANSWER b. high yielding debt instruments For those owning preferred classes of stocks, priority of asset dissolution refers to - CORRECT ANSWER the order in which preferred shareholders are paid in the event of a bankruptcy liquidation Which of the following will NOT be found in a final prospectus? a. effective date and offering price b. business plan and use of the proceeds c. agreement among underwriters d. statement that the SEC neither approves nor disapproves of the issue - CORRECT ANSWER c. agreement among underwriters A customer has requested that your BD hold mail for them while they are traveling. Which of the following is TRUE? a. the request can be made verbally and need not be in writing b. the firm is not responsible for mail while being held c. while away the customer need not be made aware of other ways to monitor activity in the account An investor lending money to an entity receives back the principal amount of the loan on the a. record date b. payable date c. interest payment date d. maturity date - CORRECT ANSWER d. maturity date A corporation divests itself of all of the shares of another company it owns. This is known as - CORRECT ANSWER a spin-off Which of the following is TRUE for debt instruments issued by the U.S. Treasury? a. all are priced as a percentage of par value b. all have interest stated as a percentage of par value c. all pay semiannual interest payments d. all are issued in book-entry form - CORRECT ANSWER d. all are issued in book- entry book Which of the following organizations engaging in open-market operations acts as agents for the U.S. Treasury Department? - CORRECT ANSWER The Federal Reserve Board Which of the following constitutes a private securities transaction, or "selling away"? - CORRECT ANSWER A RR helps an old school friend issue securities for a small business under formation A RR helps an acquaintance sell some inherited stock certificates without the acquaintance becoming a customer of the firm (A private securities transaction is any sale of securities outside the scope of the regular business of the associated person involved and of the BD firm) A customer recently approved to trade options buys a put contract for the account's initial transaction. If the customer fails to return the signed option within 15 days of account approval, which of the following transactions is the customer permitted to make? a. closing purchase b. closing sale c. opening purchase d. opening sale - CORRECT ANSWER b. closing sale since the customer opened a position by buying, the only transaction permitted would be a closing sale Meeting the location requirements and the borrowing of securities when a customer wants to sell short is done by - CORRECT ANSWER the broker-dealer on behalf of the short-selling customer Which of the following statements is the most CORRECT regarding customer accounts? - CORRECT ANSWER a customer may open BOTH a cash and margin account at the same time An investor has entered into a contract to pay an investment company a specific sum of money in exchange for the company's agreement to pay the investor a specific (larger) sum of money on a specific date in the future. The investment company must be: - CORRECT ANSWER a face-amount certificate company the investor buys it for a discount from the face amount, with the agreement being that the company will pay the investor the face amount on a specific date in the future Under which of the following conditions will an investor be able to purchase mutual fund shares and pay no sales charge? - CORRECT ANSWER Under the automatic reinvestment privilege A mutual fund investor may receive up to 5 payments during the year: 4 dividend distributions and a long-term capital gains distribution An LP is a type of: - CORRECT ANSWER direct participation program Limited partnership is the most common form of DPP Which 2 of the following criteria, taken together, would cause a particular fact to be considered under information under the Insider Information and Securities Fraud Enforcement Act of 1988? - CORRECT ANSWER It is not known to the general public & It could have a strong effect on the welfare of the corporation Bondholders should expect that interest payments would always be forthcoming for all of the following EXCEPT a. subordinated debentures b. debentures c. convertible bonds d. income bonds - CORRECT ANSWER d. income bonds income bonds pay interest only if earnings are sufficient and the payments to be made are declared by the board of directors A BD firm managing an IPO wishes to give a gift to an associated person of one of the selling group members. Which of the following would be an UNACCEPTABLE gift under the rules. - CORRECT ANSWER a $125 designer edition fountain pen and desk holder Corporate accounts may trade on margin: - CORRECT ANSWER Only if it is not listed as being restricted from doing so in the corporate charter An opening transaction can be - CORRECT ANSWER either a buy or a sell Money Market Instruments are typically - CORRECT ANSWER fixed-income (debt) securities with short-term maturities A municipality wants to issue GO bonds that will put it over its statutory debt limit. Which of the following is TRUE?