FINRA Practice Exam 218 Questions with Verified Answers,100% CORRECT, Exams of Business Economics

Download FINRA Practice Exam 218 Questions with Verified Answers,100% CORRECT and more Exams Business Economics in PDF only on Docsity! FINRA Practice Exam 218 Questions with Verified Answers A savings account at a bank is guaranteed by which of the follow entities? A) FDIC B) SIPC C) FED RES D. Department of the treasury - CORRECT ANSWER A A firm is a participant 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. A. Prohibited as fraudulent and manipulative B. Permissible if the securities are deposited into escrow C. Prohibited unless the firm immediately sets aside funds for the repurchase D. Permissible if the customers retain the right to sell the securities into the open market - CORRECT ANSWER A The computation of dollar prices and accrued interest on municipal bonds is normally on what calendar basis? A. 30/360 B. 30/365 C. Actual 360 D. Actual 365 - CORRECT ANSWER A Which of the following comparisons BEST describes the essential difference between a primary distribution and a secondary distribution? A. A primary distribution can only be made for equity issues while a secondary distribution can be made for both equity and debt issues B. A primary distribution can only be made of issues that exceed a specified dollar amount while a secondary distribution can be made for issues of all sizes C. A primary distribution must be made at a fixed public offering price (POP) while a secondary distribution must be made at the current market price D. 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. - CORRECT ANSWER D Which of the following investments are generally traded according to their average life rather than their stated maturity dates? A. Corporate bonds B. Government bonds C. Assets-backed securities D. Fixed-rate capital securities - CORRECT ANSWER C Under normal circumstances, a customer's letter of intent on a mutual fund purchase is valid for what maximum period of time? A. 3 months B. 6 months C. 13 months D. 24 months - CORRECT ANSWER C A customer buys 1 ABC Jan 35 put for a premium of $3 and simultaneously buys 100 shares of ABC stock for $35 per share. The customer will break even when the stock is selling at what price per share at expiration? A. $3 B. $32 C. $35 D. $38 - CORRECT ANSWER D Which of the following form U4 reportable events results in a statutory disqualification? A. A personal bankruptcy filing B. A written customer complaint alleging misappropriation of assets C. A felony theft charge D. A felony conviction for a driving under the influence (DUI) charge - CORRECT ANSWER D B. a premium C. a discount D. asset value - CORRECT ANSWER B Blue-sky laws are regulated by which of the following entities? A. SEC B. MSRB C. FINRA D. State securities regulators - CORRECT ANSWER D Upon expiration, all in-the-money S&P 100 index call options are settled by the delivery of which of the following? A. Cash B. S&P 100 index stocks C. S&P exchange-traded fund (ETF) D. The same number of S&P 100 index put options - CORRECT ANSWER A The owner of which of the following products is MOST exposed to inflationary risk? A. Utility stocks B. T-bills C. T-bonds D. Blue chip industrials - CORRECT ANSWER C Which of the following actions violates FINRA Rules regarding selling away? A. Recommending to a customer the services of another broker-dealer B. Sharing commissions with another registered representative in the same Broker-Dealer C. Advising customers to buy mutual funds at amounts just below a discount level D. Engaging in private securities transactions without written prior consent of the employing Broker-Dealer - CORRECT ANSWER D A customer is an officer of a company that is involved in some significant changes. All of the following items are examples of corporate affairs that could be considered inside information if the customer shares them with his registered representative except: A. Pending transactions B. declared stock dividend C. Top management changes D. Imminent financial liquidity problems - CORRECT ANSWER B Which of the following statements is true about all US gov 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 Which of the following investment risks is the greatest risk in a variable life insurance policy? A. Credit risk B. Market risk C. Inflation risk D. Interest rate risk - CORRECT ANSWER B An associated person who is not a registered representative is permitted to engage in which of the following activities? A. Accept an unsolicited customer order B. Provide account opening forms to a new customer C. Discuss the attributes of a particular investment product D. Prequalify prospective customers as to investment objectives - CORRECT ANSWER B Which of the following represents the effect of a stock split? A. The price per share of common stock increases B. The price per share of common stock decreases C. Each stockholder's proportionate ownership decreases D. Each stockholder's proportionate ownership increases - CORRECT ANSWER B 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 FinCEN accomplishes its mission to safeguard the financial system from the abuses of financial crime, including terrorist financing the money laundering, by enforcing: A. SEC regulations B. The Bank Secrecy Act C. The Securities Act of 1933 D. The investment company act of 1940 - CORRECT ANSWER B Which of the following security types provides investors with a stated maturity date, a floating interest rate, and an option to put the security back to a financial intermediary on a daily or weekly basis? A. Equity put option B. Perpetual preferred stock C. Variable rate demand note D. Tax-deferred variable annuity - CORRECT ANSWER C Under the Securities act of 1933, registration is required for which of the follow securities? A. Eurodollar bonds B. Municipal securities C. American Depositary Receipts (ADRs) D. Securities issued by the federal government - CORRECT ANSWER C Call protection is MOST valuable to bond owner when bond prices are generally: A. rising B. falling C. stable D. Fluctuating - CORRECT ANSWER A Which of following actions is required of a broker-dealer's anti-money laundering (AML) program? A. Designating an AML compliance officer B. Filing of the firm's AML program with FINRA C. Conducting background checks of all employees D. Identifying to regulators the employees responsible for Currency Transition Reports (CTRs) - CORRECT ANSWER A B. Each state's securities administrator C. A registered principal of the RR's firm D. The investment management division of the appropriate regional SEC office - CORRECT ANSWER C A transaction in which a writer covers a position by purchasing an option is called: A. A closing sale B. A closing purchase C. An opening sale D. An opening purchase - CORRECT ANSWER B Which of the following products is adversely impacted if the issuer's credit rating is downgraded? A. Mutual funds B. Unit investment trusts (UITs) C. Exchange-traded funds (ETFs) D. Exchange-traded notes (ETNs) - CORRECT ANSWER D 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 All of the following risk apply to both foreign and domestic debt instruments except: A. Political B. Exchange C. Repayment D. Interest rate - CORRECT ANSWER B Under SEC Regulation S-P (Consumer Privacy), which of the following information must a firm include in its customer privacy and opt-out notices? A. The address of the firm's website B. The fee to opt out from the privacy program C. The deadline by which to opt out from the privacy program D. The policies to protect the security of nonpublic information - CORRECT ANSWER D No-load mutual funds may have lower expense ratios than load mutual funds which of the following reasons? A. No-load funds do not charge 12b-1 fees B. No-load funds are not permitted to charge a 12b-1 fee greater than 25 basis points C. Sales charges for load mutual funds increase their annual expense ratios D. Fund management fees for no-load funds are always lower than load funds - CORRECT ANSWER B Under FINRA rules, which of the following activities by a registered representative requires written notification to her firm? A. Volunteering as a youth soccer league coach B. Gambling resulting in winnings in excess of $10,000 C. Driving part time for a transportation network company on weekends D. Selling nonproprietary investment company securities products through her firm - CORRECT ANSWER C What is the cost basis of an inherited mutual fund? A. The net asset value (NAV) of the shares when the owner dies B. The NAV 30 days after the owner's death C. The same cost basis as the deceased D. The same cost basis as the decreased plus capital gains distribution - CORRECT ANSWER A A customer has a cash balance in her account together with long positions in several securities. She has made no securities transactions in the account during the past 18 months. How often must the firm send her an account statement? A. Monthly B. Quarterly C. Semiannually D. Annually - CORRECT ANSWER B A broker-dealer is permitted to accept payment for a new issue from a new customer when the: A. registration is effective B. Red herring is delivered C. preliminary prospectus is amended D. transaction takes place during the cooling-off period - CORRECT ANSWER A If a market maker posts a quote of 10.00-10.10 [25X10], which of the following actions is the market maker willing to make? A. Sell 1000 shares at 10 and buy 2500 shares at 10.10 B. Buy 2500 shares at 10 and sell 1000 shares at 10.10 C. Sell 100 shares at 10 and buy 250 shares at 10.10 D. Buy 250 shares at 10 and sell 100 shares at 10.10 - CORRECT ANSWER B 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: A. a broker B. an underwriter C. a market maker D. a transfer agent - CORRECT ANSWER C In which of the following situations is an employee of a public company permitted to trade upon information without violating insider trading laws? A. An independent securities analyst explains to the employee why the earnings for the company next quarter could be markedly poorer than expected/ B. The employee's neighbor works for the government and informs him that the government will award a major contract to the company next month. C. The employee's spouse works in the corporate headquarters and shares with him a conversation overheard at working regarding possible acquisition targets. C. Original issue discount D. Coupon rate and call date - CORRECT ANSWER B Which of the following statements is true regarding a customer account held as tenants in common? A. The owner must equally share the assets B. The ownership of the decedent's assets is governed by their will or state law C. Tenants in common is permitted for use only for two individuals D. Tenants in common is permitted for use only for married couples or family members - CORRECT ANSWER B The primary purpose of a syndicate desk in the context of an equity offering is to: A. Determine the list if selling shareholders B. Build an order book and allocate the stock C. Solicit interest from investors in the stock offering D. Chaperone company management during the road show - CORRECT ANSWER B Which of the following statements is true regarding the concept of an annuity contract? A. Payouts of investment in a nonqualified annuity are all income tax-free B The kind of annuity selected partly determines the payment amounts to the annuitant C. In the case of life annuity contracts, the age the sex of the annuitant do not affect the payment amounts D. The amounts of the periodic payments to the annuitant are determined by the performance of the insurance company's investment returns - CORRECT ANSWER B Which of the following outcomes are possible for the writer of a covered call option? A. Profit limited and loss limited B. Profit limited and loss unlimited C. Profit unlimited and loss limited D. Profit unlimited and loss unlimited - CORRECT ANSWER A Regular way settlement on T-bonds is? A. Same day B. Next business day C. second business day (skip day) D. fifth business day - CORRECT ANSWER B 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 particiapte in this offer and tenders his 1000 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? A. 0 B. 100 C. 900 D. 1000 - CORRECT ANSWER D A clearing corporation agent or depository for securities transactions A) can never be a corporation. B) can be a bank or corporation only if they are also a broker-dealer. C) can be a commercial bank. D) must be a broker-dealer. - CORRECT ANSWER C Explanation A clearing agent can be a broker-dealer but doesn't have to be. In addition to broker-dealers, commercial banks can act as clearing agencies and depositories, as can corporations that are set up specifically to clearing securities transactions and taking custody of funds and securities. For a callable bond priced at a discount, A) yield to call (YTC) will be lower than the current yield (CY). B) yield to maturity (YTM) will be lower than the yield to call (YTC). C) yield to call (YTC) will be lower than the coupon. D) yield to maturity (YTM) will equal yield to call (YTC). - CORRECT ANSWER B Callable discounts --> Maturity lower than Current Yield Explanation For callable bonds trading at a discount, YTC will be the highest possible yield, higher than YTM, CY, and the coupon (stated or nominal) yield. Which of the following is not a type of real estate direct participation program? A) Raw land B) Income C) New construction D) Existing properties - CORRECT ANSWER B Explanation Direct participation real estate programs come in three types: raw land, new construction, and existing properties. Income is a type of oil and gas program. Which of the following must be signed by a customer wanting to open a margin account? A) Risk disclosure document and credit agreement B) Credit and hypothecation agreements C) Loan consent and hypothecation agreements D) the Options Clearing Corporation (OCC). - CORRECT ANSWER B Explanation Initially, a branch office manager (BOM) can approve an options account. However, all options accounts must ultimately be approved by the firm's ROP, and done so promptly. Which of the following records must be kept for six years? Customer statements Customer new account forms Customer confirmations Customer order tickets A) III and IV B) I and IV C) II and III D) I and II - CORRECT ANSWER D Explanation The buy and sell and quantity information on the order tickets and confirmations statements will show up on the customer's monthly or quarterly statements. Monthly and quarterly statements must be kept six years. If a married couple have a joint account with a market value of $1 million and a debit balance of $600,000, all of which is in securities, how much coverage would this account have? A) $600,000 B) $500,000 C) $1 million D) $400,000 - CORRECT ANSWER D Explanation A joint account has a maximum coverage of $500,000; however, in a margin account only the equity is covered, so the debit balance is subtracted from the market value, leaving $400,000 equity. A certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor is A) an ownership certification. B) a stock certificate. C) a bond. D) a bond or stock power. - CORRECT ANSWER C Explanation A bond is best described as a certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor. A bond certificate also states the borrower's obligation to pay the investor a specific rate of interest for the use of the funds. When XYZ is trading at 40, an XYZ 30 put sold at 3 would be A) at the money. B) out of the money. C) in the money. D) at parity. - CORRECT ANSWER B All puts are in the money when the market price is below the strike price. They are out of the money when the market price is above the strike price. They at the money when the market price equals the strike price. They are at parity when the premium equals the intrinsic value. Fingerprint cards are required by the Securities and Exchange Commission (SEC) to be filed with A) the U.S. Attorney General. B) Financial Industry Regulatory Authority (FINRA). C) any self-regulatory organization (SRO) approved by the SEC. D) the SEC. - CORRECT ANSWER A Explanation The SEC upon application for registration requires that fingerprint cards be filed with the U.S. Attorney General. An individual who purchases securities for a personal account is called A) an accredited investor. B) a market maker. C) a retail investor. D) an institutional investor. - CORRECT ANSWER C Explanation An individual who makes investments such as the purchase of securities for his account rather than for an organization is a retail investor. This investor may be accredited, but there is no way to know for sure given the limited information. Which of the following characteristics are typical of an exchange-traded product (ETP)? A) short-term debt obligations issued weekly. B) short-term debt obligations issued monthly. C) intermediate-term debt obligations issued monthly. D) intermediate-term debt obligations issued weekly. - CORRECT ANSWER A Explanation Treasury bills are short-term debt obligations of the U.S. government issued weekly. Someone who purchases shares of a corporation's common stock has A) limited liability and voting rights. B) unlimited liability and voting rights. C) neither liability nor voting rights. D) no liability and no voting rights. - CORRECT ANSWER A Explanation Common stockholders enjoy limited liability in that they can only lose what was invested. They are in no way responsible for any debt of the corporation. Voting rights are one of the key benefits for common shareholders. Which of the following has the greatest influence on the money supply within the United States? A) The Federal Open Market Committee (FOMC) B) The Depository Trust Corporation (DTC) C) The Internal Revenue Service (IRS) D) The Securities Exchange Commission (SEC) - CORRECT ANSWER A Explanation The Federal Reserve Board (FRB) influences the money supply by buying and selling U.S. government securities in the open market which expand or contract the money supply. The Federal Open Market Committee (FOMC) consists of the Board of Governors of the Federal Reserve System and several Reserve Bank presidents. The committee meets regularly to direct the government's open- market operations. For example, when the FOMC directs the purchase of securities, it increases the supply of money in the banking system, and when it sells securities, it decreases the supply. All of the following would be included in the expense ratio of a fund except A) portfolio management fee. B) salaries and administrative fees. C) 12b-1 fee. D) front-end or back-end load. - CORRECT ANSWER D Explanation The expense ratio includes ongoing operating expenses but not sales charges. A front- or back-end load is a sales charge. A customer has purchased a stock and then sold it before paying for the purchase. This is generally known as A) freeriding. B) pegging. C) a wash sale. D) backing away. - CORRECT ANSWER A Explanation Freeriding is a term used when securities are purchased and then sold before making payment for the purchase. Freeriding is generally prohibited in both cash and margin accounts. Which option has an obligation and is bearish? Which option has rights and are bullish? Which option has an obligation and are bullish? Which option has rights and are bearish? - CORRECT ANSWER Short calls have an obligation and are bearish. Long calls have a right and are bullish. Short puts have an obligation and are bullish. Long puts have a right and are bearish. (short=obligation) (long=right) For tax purposes, investment income is A) always taxed at an investor's ordinary income tax rate. B) never taxable at ordinary income tax rates. C) taxed at either ordinary income tax or capital gains tax rates. D) always taxed at the capital gains tax rate. - CORRECT ANSWER C Explanation Sell stop orders are placed below the current market price and become market orders once the price touches or passes through the stop price. SSO below current market price (SSO FALL BELOW) Your client James Thomas is an active trader and wants to invest in a managed equity portfolio that he can trade intraday. Which of the following should you recommend? A) An exchange-traded note (ETN) B) A closed-end fund C) A mutual fund D) An exchange-traded fund (ETF) - CORRECT ANSWER B Explanation A closed-end fund is actively traded and most of them are equity funds and they trade on the exchanges like stocks. Mutual Funds can be equity funds and can be actively managed, but because they only trade once per day, they are not good for active trading. ETFs are actively traded but are not actively managed, ETNs are debt securities not equities. For primary and secondary markets, which of the following is true? A) In the secondary market, all sales proceeds go to the issuer. B) In the primary market, securities are sold to the public and the issuer receives the sale proceeds. C) In the secondary market, securities transactions cannot take place on an exchange. D) In the primary market, securities are purchased from and sold to individual investors. - CORRECT ANSWER B (like a market, sell to the public, receive money) Explanation In the primary market, the issuer of the securities receives the proceeds generated by the sale of the securities. In the secondary markets, such as an exchange or over-the-counter (OTC) securities trade between investors, one sells securities to another, and the issuer is not involved in the transaction. 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? A) The customer has a business relationship with the registered representative outside of the firm. B) The customer is an immediate family member of the registered representative. C) Both are employed by and registered in the industry with the same broker-dealer. D) The customer has a personal relationship with the registered representative outside of the firm. - CORRECT ANSWER B (Family are the exception) Explanation There are two exceptions to the written notice and approval requirement for permitted lending arrangements between customers and registered representatives. They are when both are immediate family members or when the customer is a lending institution and the loan is a standard commercial lending transaction. Define: An account in which a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers. - CORRECT ANSWER Prime Brokerage The broker loan rate charged by banks is also known as A) the call loan rate. B) federal funds rate. C) discount rate. D) prime rate. - CORRECT ANSWER A (call LOAN) Explanation The broker loan rate or call loan rate is the interest rate banks charge broker- dealers on money that broker-dealers borrow to lend to margin account customers. An investor is short 1 December 15 put at 6. The investor's maximum loss on this position is A) $60. B) $1,500. C) $2,100. D) $900. - CORRECT ANSWER D Explanation A put writer's maximum loss is the put's strike price (15) less the premium received (6)—in this case, 9 points. Note that this is the same as the breakeven. This maximum loss occurs when the stock price drops to zero. The investor is forced to buy the worthless stock at the option's strike price of 15 and, therefore, has lost 15 points. The investor's total The U.S. Guarantee Association B) The broker-dealer who sold it C) A parent company D) The U.S. government - CORRECT ANSWER C (parents guarantee love) Explanation A guaranteed bond is back by a third party, normally a parent company backing the debt of a subsidiary company. When a bond is purchased at a premium, the current yield will be A) lower than the coupon rate. B) higher than the stated rate. C) the same as the nominal rate. D) higher than the fixed rate. - CORRECT ANSWER A Explanation The coupon rate, the stated rate, the fixed rate, and the nominal rate all mean the same thing. It is the amount the bond will pay each year. On a premium bond the coupon rate is always higher than the current yield. Which is higher when the bond is purchased at a premium? (Current yield or Coupon Rate) Which is higher when the bond is purchased at a discount? (Current yield or Coupon Rate) - CORRECT ANSWER Premium: higher coupon, lower current yield Discount: Lower coupon, higher current yield 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 A) stagflation. B) deflation. C) stagnation. D) inflation. - CORRECT ANSWER A Explanation Stagflation is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy isn't growing (there is a lack of consumer demand and business activity), yet prices for goods are still rising. Distributions from IRAs are taxed at A) long-term capital gains rate on the full amount of the distribution. B) ordinary income tax rates on the amount of the distribution that exceeds the amount contributed. C) ordinary income tax rates on the full amount of the distribution. D) long-term capital gains rate on the amount of the distribution that exceeds the amount contributed. - CORRECT ANSWER C (IRA= I already ate, i'm FULL) Explanation Because no taxes were paid on the amount deposited, the full amount is taxable at distribution, and even though some of the distribution is from capital gains, the whole amount is taxed at the ordinary income tax rate. The United States Congress has authorized all of the following enterprises to issue securities except A) Government National Mortgage Association (GNMA). B) Federal Home Loan Mortgage Corporation (FHLMC). C) Federal Deposit Insurance Corporation (FDIC). D) Federal National Mortgage Association (FNMA). - CORRECT ANSWER C (insures banks not securities) Explanation The Federal Deposit Insurance Corporation (FDIC) does not issues securities but is set up to insure bank deposits in the event of bank failure. Rules regarding restricted persons state that each of the following is considered immediate family except A) parents. B) a brother or a sister. C) an aunt or an uncle. D) a mother-in-law or a father-in-law. - CORRECT ANSWER C Explanation Rules regarding restricted persons define immediate family as spouses, parents, siblings, in-laws, and children. Aunts and uncles and grandparents are excluded (not considered immediate family). All of the following names describe the Securities Act of 1933 except A) The Exchange Act. B) D) long-term gains are taxed at more favorable long-term rates. - CORRECT ANSWER B Explanation Investment income, which includes capital gains realized on securities positons, is taxable. Depending on how long a security was held, the gains might be taxable at the investor's ordinary income tax rate (for short-term gains) or at a more favorable long-term rate if the position was held for longer than 12 months. Which of the following are true of Traditional IRAs but not Roth IRAs? Contributions may be deductible. Contributions are always deductible. There is a 50% penalty for failing to take the minimum required distribution (RMD). There are income limits for making contributions. A) I and II B) I and III C) II and III D) III and IV - CORRECT ANSWER B ( May contribute to tradition, 50% of all IRA's) Explanation If the contributor has an employer sponsored plan and makes over the limit, they can still have an IRA but it won't be deductible. After reaching age 72, RMDs must be taken each year. Failure to do so results in a 50% penalty. Income limits on traditional IRAs impact deductibility not contributions. Which of the following investments would not require heightened suitability requirements before recommending them to your clients? A) A hedge fund B) A utilities mutual fund C) An oil and gas limited partnership D) An exchange-traded note (ETN) - CORRECT ANSWER B (Mutual benefit, suitable for all) Explanation Mutual funds are generally suitable for a broad class of investors. ETNs, limited partnerships, and hedge funds all have specific suitability requirements. The risk that all or a significant portion of the sum invested might be lost is known as A) capital risk. B) purchasing power risk. C) call risk. D) market risk. - CORRECT ANSWER A Explanation Particularly when taking aggressive positions, such as in options or DPPs, there is a greater likelihood that a substantial portion of the initial investment can be lost. This is best described as capital risk. What is the name for the legal framework of state laws for broker-dealers, registered representatives, investment advisors and investment advisor representatives? A) The Uniform Securities Act B) The Securities Act of 1933 C) The Investment Advisor Act D) The Securities and Exchange Act of 1934 - CORRECT ANSWER A Explanation The Uniform Securities Act is a template for state securities laws in the United States. A Financial Industry Regulatory Authority (FINRA) maintenance call will occur in a long account if the equity drops below A) 35% or $2,500. B) 50% or $2,500. C) 30% or $2,000. D) 25% or $2,000. - CORRECT ANSWER D Explanation In a long account equity must be maintained at 25% or $2,000, whichever is greater. If a broker-dealer suspects that a transaction involves funds derived from illegal activity, a suspicious activity report (SAR) would be triggered at what threshold? A) At least $5,000 in funds or other assets B) More than $10,000 in funds or other assets C) At least $10,000 in funds or other assets D) More than $5,000 in funds or other assets - CORRECT ANSWER A (AT LEAST 5k) Explanation The threshold for triggering a suspicious activity report (SAR) is at least $5,000 in funds or other assets. Do not confuse this with a Currency Transaction Report (CTR), which is triggered by amounts greater than $10,000. Selling short may have a high level of risk, but it is not against the rules. Freeriding, entering matched orders, and churning are all violations. Which of the following statements is correct concerning currency risk when investing in an American depository receipt (ADR)? A) Currency risk is still a factor when purchasing an ADR. B) U.S. investors are protected from currency risk by the depositary bank. C) U.S. investors are protected from currency risk by the underlying foreign corporation. D) Currency risk is eliminated because the securities are dollar denominated. - CORRECT ANSWER A The company pays dividends in its home currency, and the issuing bank pays out those dividends in U.S. dollars. When the exchange rate changes, the amount these dividends (in U.S. dollar terms) will fluctuate as well. A company offers to repurchase outstanding debt securities it has issued directly from its bondholders for cash in what would commonly be known as A) a buy back. B) an acquisition. C) a hostile takeover. D) a tender offer. - CORRECT ANSWER D Explanation When a company offers to buy outstanding securities for cash or for cash plus other securities from its stockholders or bondholders this is known as a tender offer. In contrast, a buyback, sometimes referred to as a repurchase, is when a company buys its own outstanding securities in the open market rather than appealing directly to its investors. Partners in direct participation leasing programs can receive write-offs for all the following except A) depreciation. B) interest expenses. C) depletion. D) operating expenses. - CORRECT ANSWER C Explanation Write-offs (deductions) associated with leasing programs are those taken for operating expenses, depreciation of the equipment owned and leased, and interest costs on the loans to purchase the equipment. value of lease depreciates, oil depletes Depletion, however, is a deduction associated with natural resources programs, such as oil and gas. Which of the following choices would best describe a follow-on offering? A) An initial public offering (IPO) that has additional shares added by the issuer on the effective date B) An issue of shares by a public company that is already listed on an exchange C) The common stock that is issued attached to a rights offering D) An offering to the employees of the issuing company - CORRECT ANSWER B (Follow the Public exchange) Explanation A follow-on public offer (FPO) is an issue of shares by a public company [registered and reporting to the Securities and Exchange Commission (SEC)] that is currently listed on an exchange and has previously gone through the IPO process. FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue. Which of the following are true of long term or short-term gains or losses? A) Holding a stock and selling below its cost basis if held for over a year would be a short-term loss. B) Holding a stock and selling it above its cost basis if held for one year would be a long-term gain. C) Holding a stock and selling above its cost basis if over 12 months later would be a long-term gain. D) Holding a stock and selling below its cost basis if held for 1 year would be a long- term loss. - CORRECT ANSWER C (one year = long-term) Explanation For the holding period to be long term it must be for more than one year. John Christensen places a buy limit order at 42 when the market price of the stock is at 45. Which of the following best describes how the order would fill? A) The order can only be filled at a price of 42 or lower B) The order would be filled between when the stock price is between 42 and 45 C) The order would be filled immediately because the market price is already above 42 D) The order would be filled at the next available price after the stock price drops to 42 - CORRECT ANSWER A Bondholders should expect that interest payments would always be forthcoming for all of the following except A) debentures. B) income bonds. C) convertible bonds. D) subordinated debentures. - CORRECT ANSWER B Explanation Income bonds pay interest only if earnings are sufficient and the payments to be made are declared by the board of directors (BOD). This is not true of any of the other fixed-income securities listed (debentures, subordinated debentures, or convertible bonds). Selling long is equivalent to which of the following? A) Selling short B) Selling to close C) Selling to open D) Selling to open then buying to close - CORRECT ANSWER B Explanation When a customer owns a position and then sells that position that is referred to as selling long or selling to close. Financial Industry Regulatory Authority (FINRA) has a continuing education requirement with the goal of making sure that all registered personnel are aware of industry changes. If a registered representative has just observed her second anniversary in the industry and did the required regulatory element CE, the next time she will be required to sit for the regulatory element is A) three years from now. B) next year. C) within 120 days. D) two years from now. - CORRECT ANSWER A Explanation Having just completed her second anniversary regulatory element CE, she will be next scheduled in three years. If after a registered representative terminates the firm learns of something that should have been reported to the Central Registration Depository, how long does the firm have to make an amendment if that information would cause statutory disqualification? A) 20 days B) 10 days C) 45 days D) 30 days - CORRECT ANSWER B Explanation The rule requires notification within 10 days if the information involves statutory disqualification. Before effecting an initial penny stock transaction for a new customer, the registered representative must do all of the following except A) confirm whether the person is an established customer. B) obtain a signed risk disclosure document from the customer. C) confirm that a margin account has been established. D) obtain a signed suitability statement from the customer. - CORRECT ANSWER C Explanation According to penny stock rules, registered representatives must provide disclosure information to all penny stock buyers which customers must sign. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. Investors who are not considered established customers (new customers, as in this case) must sign a suitability statement as well. No rule prohibits penny stock purchases on margin, but there is no requirement that they be done in a margin account either. When investors buy and sell securities to and from one another, these transactions occur A) in the primary market. B) in the secondary market. C) on exchanges only. D) in the over-the-counter (OTC) market only. - CORRECT ANSWER B Explanation Primary market transactions involve the issuer or someone acting on behalf of the issuer, such as an underwriter. Secondary markets are where investors can buy and sell securities to and from one another. The secondary market includes exchanges and the OTC market. Portfolio diversifying might be used to reduce which of the following risks? A) Inflation risk B) Business risk C) Interest-rate risk GNMAs are mortgage back securities; if homeowners pay off their mortgages early, mortgage backed securities are subject to prepayment risk. All of the following are acceptable choices to function as a depository and intermediary for transactions between buyers and sellers of securities except A) the National Securities Clearing Corporation (NSCC). B) the Depository Trust Company (DTC). C) carrying firms. D) credit unions. - CORRECT ANSWER D Explanation Credit unions cannot serve as a depository or clearing facility for securities transactions. When a bond is purchased at a discount the current yield will be A) lower than the fixed rate. B) lower that the stated rate. C) the same as the nominal rate. D) higher than the coupon rate. - CORRECT ANSWER D Discount (always higher CY) Explanation On a discount bond the current yield is always higher than the coupon rate. Which of the following are true of both qualified plans and nonqualified plans? A) Tax on interest and dividends are deferred, but not on capital gains B) Contributions are tax deductible C) Contributions are not tax deductible D) The accounts grow tax deferred - CORRECT ANSWER D (plan on taxes later/deferred) Explanation With qualified plans, deposits go in before taxes and grow tax deferred. All withdrawals are taxable. With nonqualified plans, deposits are made after tax, and distributions above the cost basis are taxable. Benefits of mutual funds include all of the following except A) mutual funds report distributions annually to investors. B) reinvested dividends are not taxed until withdrawal. C) mutual funds can provide broad diversification inside a single fund. D) mutual funds are professionally managed. - CORRECT ANSWER B (reinvest in mutual funds) Explanation When dividends (or capital gains) are reinvested they are still taxed. All the other options are considered benefits of mutual funds. Regarding CDs and negotiable CDs issued by banks, A) both CDs and negotiable CDs are considered money market instruments. B) only negotiable CDs are considered money market instruments. C) neither CDs nor negotiable CDs are considered money market instruments. D) only CDs are considered money market instruments. - CORRECT ANSWER B (Only negotiate) Explanation Banks issue and guarantee CDs with fixed interest rates. Some that can be traded in the secondary market are known as negotiable CDs. Only these negotiable CDs are considered money market instruments. A March 30 call purchased at 3 has expired without being exercised. The owner of the call A) keeps the $300 paid. B) keeps the $30 paid. C) loses the $300 premium paid. D) losses the $30 paid. - CORRECT ANSWER C Explanation The owner (buyer) of the call would have paid 3 ($300) for the contract. If the contract expires unexercised, the owner loses the $300 premium paid. Broker-dealers that transact securities business with customers or other broker- dealers must apply and be approved for registration with A) the Chicago Board Options Exchange (CBOE). B) the Municipal Securities Rule Board (MSRB). C) the Financial Industry Regulatory Authority (FINRA). D) the Securities and Exchange Commission (SEC). - CORRECT ANSWER D Explanation The SEC is the securities industry's primary regulatory body. Broker-dealers that transact securities business with customers or with other broker-dealers must apply and be approved for registration with the SEC. I and IV C) II and III D) I and III - CORRECT ANSWER D Explanation A registered representative may share in profits and losses with a customer if the customer gives consent and the principal gives permission in writing. The trades must be done in a joint account, and the representative must share in both profits and losses to the extent of his proportional investment in the account. The proportion requirement is waived if the customer is a family member of the representative. Your client, Quinn, wants to place an order to sell a stock in her portfolio when the current price is 45, but she is only willing to sell if she can sell for at least 47. Which order should she place? A) A sell stop limit order B) A sell limit order C) A market order D) A sell stop order - CORRECT ANSWER B Explanation Sell limit orders are placed above the current market price and fill at the stated price or higher market orders fill at the next available price; sell stop and sell stop limit orders are not triggered until the market drops to or through the stop price. A market maker A) trades in a customer's account standing ready to buy or sell at their own discretion. B) trades in a proprietary account to facilitate trading of a security and provide liquidity. C) acts as an agent to buy and sell for public customers who will hold their own securities. D) can only be an institution doing proprietary trading. - CORRECT ANSWER B (facilitate liquidity) Explanation Any entity, individual or institution, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security is known as a market maker or trader. A company's net worth belongs to its A) president and CEO. B) bond holders. C) stockholders. D) board of directors (BOD). - CORRECT ANSWER C Explanation A company's net worth (assets − liabilities) belongs to the business owners (its stockholders). What does Selling to open mean? What can it not do? - CORRECT ANSWER A short sell, cannot be done in cash accounts John Bourne places a buy limit order at 42 when the market price of the stock is at 45. Which of the following best describes how the order would fill? A) The order would be filled between when the stock price is between 42 and 45. B) The order would be filled immediately because the market price is already above 42. C) The order would be filled at the next available price after the stock price drops to 42. D) The order can only be filled at a price of 42 or lower. - CORRECT ANSWER D Explanation Buy limit orders are placed below the current market price and fill at the stated price or lower. For real estate program partners, tax credits will A) be applicable in all types of real estate programs. B) add to the appreciation of the real estate properties. C) reduce tax liability dollar for dollar. D) reduce taxable income from rents received dollar for dollar. - CORRECT ANSWER C (real tax reduce tax) Explanation Offered by the federal government for only certain types of real estate programs (not all), tax credits reduce tax liability dollar for dollar. In this light, credits are considered far greater benefits than deductions, which only reduce taxable income. An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell A) immediately, with no volume restrictions. B) immediately, subject to Rule 144 volume limitations. C) only after leaving (becoming unaffiliated with) the company. D) A broker-dealer selling securities out of its inventory to the public - CORRECT ANSWER D Explanation Secondary market transactions are investor-to-investor transactions. Primary market transactions are issuers selling to the public. A broker-dealer selling securities from its own inventory is operating in the secondary market (likely as a market maker in the OTC market). Who does the secondary market transaction include? Who does the primary market transaction include? - CORRECT ANSWER Second: Investor-to-investor Primary: Issuers-to-the public When a bond is purchased at a discount the current yield will be A) lower than the fixed rate. B) higher than the coupon rate. C) lower that the stated rate. D) the same as the nominal rate. - CORRECT ANSWER B Explanation The coupon rate, the stated rate, the fixed rate, and the nominal rate all mean the same thing. It is the amount the bond will pay each year. On a discount bond the current yield is always higher than the coupon rate. Which of the following is the best description of a limited partnership? A) An investment that exempts individual investors from reporting gains or losses B) An investment that permits both gains and losses to pass through to the investors C) An investment that allows for losses only to pass through as write-offs to the investors D) An investment that allows only for income to flow through to the investors - CORRECT ANSWER B (best of both) 2 partner gains and losses Explanation Limited partnerships (LPs) are investment opportunities that permit the economic consequences of a business to flow or pass through to investors (limited partners). These would include the consequences of both income received and losses incurred. Ownership of a security indicates that one is A) long the position and bullish. B) long the position and bearish. C) short the position and bearish. D) short the position and bullish. - CORRECT ANSWER A Explanation Owning a security means that one is long the position. When one is long (owns) the security, the person is bullish, anticipating it will go up in value in the hopes of selling it later at a higher price than it was purchased for. Of the following strategies, which is considered most risky in a strong bull market? A) Buying calls B) Writing puts C) Buying puts D) Writing calls - CORRECT ANSWER D Explanation Short (writing) calls are bearish and have an unlimited maximum loss potential. In wanting the stock to go down, one's risk is that the underlying stock goes up and, in theory, could go as high as infinity. Which of the following is considered a benefit for broker-dealers offering margin accounts to their customers? A) The ability to accommodate more conservative clients B) The additional employment of operational personnel to administer the accounts C) The ability to pledge customer securities for loans D) The additional income generated from the payment of margin interest - CORRECT ANSWER D Explanation Margin interest paid by customers is considered a source of income for broker- dealers and pledging the customer's securities as collateral for the loan is simply a necessary part of offering margin to customers. The need for more operational staff is a cost, not a benefit, and margin accounts are not typically attractive to conservative investors. ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's price-to-earnings ratio is higher, that would indicate A) ABC sales are lower than MNO's. B) ABC's net income is less than MNO's. C) ABC's net income is higher than MNO's. D) ABC's sales are higher than MNO's. - CORRECT ANSWER B What limit is placed on the number of outstanding shares a mutual fund may have in the hands of investors? - CORRECT ANSWER Unlimited The reason a mutual fund is also called an open-end investment company is that it may sell an unlimited number of shares to the public. This is referred to as a continuous primary offering. What is intrinsic value? How do we know when calls are in the money? How do we know when puts are in the money? - CORRECT ANSWER Intrinsic value is the amount that a contract is in the money. All calls are in the money when the market value of the stock is ABOVE the strike price. All puts are in the money when the market value of the stock is BELOW the strike price. When a corporation issues a mortgage bond, the issue's total value A) is unrelated to the value of the real estate because it is an unsecured debt instrument. B) must equal the value of the real estate by which it is backed. C) should be greater than that of the real estate it is backed by. D) should be less than that of the real estate it is backed by. - CORRECT ANSWER D Mortgage bond issues represents the amount the issuer is borrowing that is backed by its real estate assets. the amount borrowed shouldn't exceed the value of the property. A tombstone advertisement placed before the effective date can A) be placed by the issuer directly or by the underwriters. B) always be deemed to be an offer to sell the securities. C) only be placed by the issuing company. D) only be placed by those assisting the issuing company in the underwriting. - CORRECT ANSWER A Explanation Tombstone advertisements can be placed by either the issuer or the underwriters and are the only ads that can be placed before the registration's effective date. . 1. When XYZ is trading at 30, an XYZ 40 put sold at 3 would be? Which is the market price which is the strike price? 2. When a XYZ 40 call sold at a premium of 3 when the current market value of XYZ is at 30 it would be? Which is the market price which is the strike price? - CORRECT ANSWER 1. In the money -40 is the strike price, 30 is the market price 2. Out of the money -40 is strike price, 30 is market price Who and when does one file a Form U-5? - CORRECT ANSWER That form is filed by the member firm upon the termination of a registered representative for any reason. When interest rates are falling, which bonds are most likely to expose holders to call risk? A) All bonds, regardless of the coupon rate B) All bonds, regardless of whether or not they are callable C) Callable bonds with lower coupons D) Callable bonds with higher coupons - CORRECT ANSWER most risk: Interest falls - High Coupons (cost issuers most in interest payments) Explanation When interest rates fall, issuers will call in their callable debt issues with the highest coupon rates first. These are the ones currently costing the issuer the most in interest payments. Private placements are primarily sold to A) individuals who meet the definition of accredited investor. B) institutional investors. C) general public investors. D) investment bankers. - CORRECT ANSWER B (private institution) Explanation Although private placement securities may be sold to small numbers of wealthy individuals who meet certain net worth and income criteria (accredited investors), most investors are institutional investors. WHEN and WHO is responsible for seeing that Form U-4 is completed and filed? - CORRECT ANSWER When: When a new associated person is hired at a broker- dealer firm Ensuring that the investing public is fully informed about a security and its issuing company when shares are first sold in the primary market is covered under which of the following federal acts? A) Securities Exchange Act of 1934 B) Uniform Securities Act C) Investment Company Act of 1940 D) Securities Act of 1933 - CORRECT ANSWER D (1933 public fully informed) Explanation Companies looking to offer securities to the public must provide a prospectus to those who are approached to purchase the shares. This requirement ensures that the investing public is fully informed about a new security and its issuing company. What was the Securities act of 1933? - CORRECT ANSWER (1) Fully inform public investors about investments, and (2) to establish laws against misrepresentation and fraudulent activities in the securities markets. (3) shelf What was the Securities act of 1934? - CORRECT ANSWER -Secondary trading -created SEC An investor is long 1 May 35 call at 5. The 35 in this contract represents A) the strike price, the price the investor can purchase stock at. B) the strike price, the price the investor has paid for the contract. C) the premium, the price the investor has paid for the contract. D) the premium, the price the investor can purchase stock at. - CORRECT ANSWER A (date # call/put is the STRIKE) (investor strikes the right to purchase at this) Explanation For this contract, 35 is the strike price, which represents the price at which the investor has the right to purchase stock, and 5 represents the $500 premium paid for the contract. An investor is long a call option. Over time, the underlying security rises in value above the strike price of the call. It is likely that the call would A) be exercised. B) not be exercised. C) decline in value. D) have no intrinsic value. - CORRECT ANSWER A (investor wants call to be in the money; Market above stike) Once that happens they would want to exercise Explanation Those who own call options want the value of the underlying stock to go above the strike price of the call. The current market value of the underlying going above the strike price makes the option contract in the money (it has intrinsic value). The investor would either exercise the option or sell it for a profit. The cost of doing business is closely linked to the cost of money; the cost of money is called? What determines it's rate that must be paid? - CORRECT ANSWER Interest. In large measure, the supply and demand of money determines the rate of interest that must be paid to borrow it. All of the following are true regarding customer account statements except A) monthly statements need not be sent if the only account activity is the receipt of interest or dividends. B) customer statements containing penny stocks must be sent monthly, even if no activity occurred in the account. C) customers must be alerted to report any inaccuracies or discrepancies promptly. D) customer statements must be sent at least quarterly, activity or not. - CORRECT ANSWER A (any activity in the account will trigger monthly statements) Under the Uniform Transfers to Minors Act (UTMA) a custodian has control over the account and can do each of the following except A) liquidate, trade, or hold securities. B) exercise right or warrants. C) buy or sell securities. D) sell short and write uncovered call options. - CORRECT ANSWER D Explanation Selling short and writing uncovered options present unlimited risk and is inappropriate in an account held for a minor and therefore not permitted. When must a new options customer return a signed option account agreement form? A) At or before the customer receives the options disclosure document (ODD) B) Before the first order is entered C) Before the account is approved by a registered options principal (ROP) D) Within 15 calendar days of the account approval - CORRECT ANSWER D No one can be contacted even if a trusted contact person was named until a regulatory body has investigated. B) The Securities and Exchange Commission (SEC) must be notified immediately and no disbursements can be made until an investigation by the SEC has been concluded. C) Anyone who knows the customer can be contacted and a permanent hold on disbursements from the account is mandated. D) A trusted contact person if one was named can be contacted and a temporary hold on disbursements from the account can be administered. - CORRECT ANSWER D Explanation If the member firm reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted, it can place a temporary hold on disbursements of funds or securities and contact a trusted contact person if one was named. Banker's acceptances are A) short-term time drafts issued by banks to the federal government. B) intermediate-term debt instruments issued by the federal government to banks. C) intermediate-term debt instruments issued by banks to corporations. D) short-term time drafts issued by banks to corporations. - CORRECT ANSWER D (Short banker, banks are corp) Explanation Used by corporations to finance international (foreign) trade, BAs are issued by banks to corporations. They are considered money market instruments because of their short-term maturities, generally no longer than 270 days (9 months). In the dividend disbursement process three of the four critical dates are determined by the board of directors (BOD) but one is determined by either Financial Industry Regulatory Authority (FINRA) for OTC stocks or the exchange for listed stocks. Which one is it? A) ex-dividend B) record C) declaration D) payable - CORRECT ANSWER A (BOD doesn't want your EX) (BOD doesn't want dividends paid) Explanation Declaration, record, and payment dates are determined by the board of directors (BOD), but FINRA, or the exchange, determines the ex-dividend date.