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Securities and Investment Concepts, Exams of Business Finance

A variety of topics related to securities and investment concepts, including margin accounts, mutual funds, options, bonds, taxes, and real estate investments. It presents multiple-choice questions and answers that test the reader's understanding of these financial concepts. Insights into the mechanics of securities transactions, the characteristics of different investment products, and the tax implications of various investment strategies. By studying this document, one can gain a deeper understanding of the fundamental principles and regulations governing the securities industry, which is crucial for making informed investment decisions and navigating the complex financial landscape.

Typology: Exams

2023/2024

Available from 09/24/2024

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Download Securities and Investment Concepts and more Exams Business Finance in PDF only on Docsity! FINRA Series 7 Stimulated Exam 3|42 Questions with Verified Answers Which of the following option strategies, besides going long a call, can be used to purchase stock below its current market value? A) Short call B) Short straddle C) Long put D) Short put - CORRECT ANSWER A) Short call B) Short straddle C) Long put D) Short put✅ If the put is exercised by the owner, the writer of the put will be obligated to purchase the stock. The cost of the stock is reduced by the amount of premium taken in when the put was written, allowing the investor to purchase the stock at a net cost lower than the stock's current market value. The sale of securities in a restricted margin account affects all of the following except A) market value. B) special memorandum account. C) debit balance. D) equity. - CORRECT ANSWER A) market value. B) special memorandum account. C) debit balance. D) equity.✅ A restricted margin account is one where the equity is below the 50% Regulation T level. When a sale of securities owned in that margin account takes place, if the client wishes to remove proceeds, the maximum permitted is 50% of the sale. Your client's investment portfolio is 50% growth stocks, 10% foreign stocks, and 40% blue-chip stocks. If the client is interested in further diversification, which mutual fund would best meet that goal? A) Aggressive growth fund B) Emerging market fund C) Bond fund D) Global equity fund - CORRECT ANSWER A) Aggressive growth fund B) Emerging market fund C) Bond fund✅ D) Global equity fund All of the current holdings are equities. To further diversify the current portfolio, the bond fund would be the best choice of those given to meet this objective. If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder? A) $600 cash B) $600 in stocks C) $325 cash D) $381 in securities - CORRECT ANSWER A) $600 cash✅ B) $600 in stocks C) $325 cash D) $381 in securities Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised. With the index closing price of 381 and the strike price at 375, that difference is 6 points. With a multiplier of $100, the settlement is $600. If a customer buys 100 XYZ at 49 and writes 1 XYZ Nov 50 call, receiving $350 in premiums, the breakeven point is A) $52.50. B) $53.50. C) $45.50. D) $46.50. - CORRECT ANSWER A) $52.50. B) $53.50. C) $45.50.✅ D) $46.50. × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds. Nancy is a 55-year-old tenured world history professor at the local state university. She has been participating in the school's 403(b) tax-sheltered annuity (TSA) program for a number of years. Her current account balance is $386,000, which is more than twice the amount of her pre-tax contributions. Nancy is taking a sabbatical for the year and plans to travel the world to visit many of the places she teaches about. To help pay for the trip, she plans to withdraw $60,000 from her account. If she is in the 24% tax bracket, the effect of this withdrawal will be A) impossible to calculate because we do not know her cost basis. B) a tax liability of $14,400. C) no tax because the money will come out of the invested principal before the earnings. D) a tax liability of $20,400. - CORRECT ANSWER A) impossible to calculate because we do not know her cost basis. B) a tax liability of $14,400. C) no tax because the money will come out of the invested principal before the earnings. D) a tax liability of $20,400.✅ The question tells us that her contributions were all tax-deductible (because her account is a TSA). That means her cost basis, for tax purposes, is zero. Every dollar withdrawn is subject to income tax, and, because Nancy has not yet attained age 59½, the 10% tax penalty applies. The math is $60,000 times 34% (the 24% plus 10%), and that equals $20,400. Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year? A) None B) $2,500 C) $5,500 D) $4,500 - CORRECT ANSWER A) None B) $2,500✅ C) $5,500 D) $4,500 He will first offset his $2,000 in capital gains, leaving $5,500 in losses. He next offsets $3,000 in adjusted gross income, leaving $2,500 in losses to carry forward to next year. Provided the loss is offset to the maximum each year, there is no limit to how long losses may be carried forward. Transactions in all of the following are effected in the money market, as opposed to the capital market, except A) U.S. Treasury bills. B) jumbo CDs. C) commercial paper. D) municipal revenue bonds. - CORRECT ANSWER A) U.S. Treasury bills. B) jumbo CDs. C) commercial paper. D) municipal revenue bonds.✅ The money market is the marketplace for short-term (less than one year) debt obligations. The capital market is where long-term capital is raised. Municipal bonds, being long term, are a part of the capital market. Each of the following can create activity in a customer's account except A) the registered representative granted discretionary authorization. B) the holder of a limited power of attorney. C) the holder of a full power of attorney. D) the trusted contact person. - CORRECT ANSWER A) the registered representative granted discretionary authorization. B) the holder of a limited power of attorney. C) the holder of a full power of attorney. D) the trusted contact person.✅ The trusted contact person has no trading authority over the account. The purpose of this person being named is to assist the member firm when there is suspicion of possible senior exploitation. A registered representative who has been granted discretionary power is able to make buy and sell decisions without contacting the client. The only difference between a limited and a full POA is that the person with a full POA can access funds as well as make trades. Using a prospectus to sell a security eliminates a salesperson's responsibility to disclose A) speculative factors about the security. B) none of these. C) a company's poor growth potential. D) a company's negative financial information. - CORRECT ANSWER A) speculative factors about the security. B) none of these.✅ C) a company's poor growth potential. D) a company's negative financial information. Distributing the prospectus may satisfy the prospectus delivery requirements of the Securities Act of 1933, but it does not negate the antifraud rules or the provisions and regulations set forth under the Securities Exchange Act of 1934. Which of the following pooled investment vehicles would most likely be structured as a limited partnership? A) A real estate investment trust B) A unit investment trust C) An exchange-traded fund D) A hedge fund - CORRECT ANSWER A) A real estate investment trust B) A unit investment trust C) An exchange-traded fund D) A hedge fund✅ For a number of legal reasons, one of those being avoiding the need to register with the SEC, hedge funds are generally structured as limited partnerships with a maximum of 100 investors. According to Municipal Securities Rulemaking Board (MSRB) rules, a municipal finance professional (MFP) is I. an associated person of a broker-dealer engaged in municipal securities representative activities other than retail sales. II. a registered representative engaged in the retail sale of municipal securities to individual investors. III. subject to the political contribution rules as outlined in MSRB Rule G-37. IV. not subject to the political contribution rules as outlined in MSRB Rule G-37. A member firm receives an order from an investment adviser to purchase shares in a common stock IPO. Regarding restricted persons, the member must A) obtain a representation from the investment adviser that the purchaser is not a restricted person. B) refuse to accept the order. C) obtain a list of all of the adviser's clients to determine eligibility. D) obtain a list of the client(s) whose account(s) will be credited with the shares to determine eligibility. - CORRECT ANSWER A) obtain a representation from the investment adviser that the purchaser is not a restricted person.✅ B) refuse to accept the order. C) obtain a list of all of the adviser's clients to determine eligibility. D) obtain a list of the client(s) whose account(s) will be credited with the shares to determine eligibility. When receiving an order to buy a new equity issue from a bank, investment adviser, or other conduit, a member must obtain a representation from the conduit that all purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons). Which of the following is not an advantage of purchasing American depositary receipts (ADRs)? A) Foreign taxes withheld can be claimed as a credit to offset income taxes on dividends received. B) Transactions are done on an organized exchange in the U.S. C) They allow U.S. investors to buy foreign country stock denominated in dollars. D) They eliminate exchange rate risk. - CORRECT ANSWER A) Foreign taxes withheld can be claimed as a credit to offset income taxes on dividends received. B) Transactions are done on an organized exchange in the U.S. C) They allow U.S. investors to buy foreign country stock denominated in dollars. D) They eliminate exchange rate risk.✅ ADRs are priced in U.S. dollars and therefore have exchange rate risk. That is, if the value of the currency in the home country of the company underlying the ADR should decline in relationship to the U.S. dollar, the investor could actually lose money even if the stock's price rises. For example, the foreign company's stock is selling for $50 per share Canadian. At the time of purchase, the Canadian dollar is worth $0.80 U.S. That would make the ADR value approximately $40 per share U.S. If the client decides to sell that ADR when the company stock is selling for $52 per share on its domestic exchange, but the Canadian dollar is now worth $0.70 U.S., the ADR's value will be approximately $36.40. Therefore, we've seen the price of the stock go up while the value of the ADR to the U.S. investor has declined. One of your customers has been regularly investing into the shares of an aggressive growth fund. The investor has a long time horizon and does not expect to touch the account for a number of years. In the event of an emergency, federal law would require redemption proceeds forwarded within A) 30 calendar days. B) 2 business days (T+2). C) 4 business days (S+2). D) 7 days. - CORRECT ANSWER A) 30 calendar days. B) 2 business days (T+2). C) 4 business days (S+2). D) 7 days.✅ One of the provisions of the Investment Company Act is that redemption requests must be honored within 7 days. One of your customers purchased a municipal bond at a basis of 3.35%. Several weeks later, the bond's basis is now 3.21%. Which of the following statements is true? I. The bond's yield to maturity has fallen by 14 basis points II. The bond's price has fallen by 14 basis points III. Market interest rates have likely decreased IV. The bond's rating has likely fallen A) II and IV B) I and III C) I and IV D) II and III - CORRECT ANSWER A) II and IV B) I and III✅ C) I and IV D) II and III The basis quote is the bond's yield to maturity. The difference between a basis of 3.35% and a basis of 3.21% is 14 basis points. What is it that causes a bond's yield to fall? It is the inverse relationship between interest rates and bond prices. The price has gone up because interest rates have fallen. FINRAs 5% markup policy does not apply to A) issues sold by prospectus. B) commissions. C) REITs. D) third-market trades. - CORRECT ANSWER A) issues sold by prospectus.✅ B) commissions. C) REITs. D) third-market trades. FINRA's 5% markup policy applies to all secondary market trades, whether customers are charged markups, markdowns, or commissions. Issues sold by prospectus and municipal securities, however, are exempt from the policy. Which of the following statements regarding the Bond Buyer 20 bond index are true? I. It includes only GO bonds. II. It includes both GO bonds and revenue bonds. III. It is computed weekly. IV. It is computed monthly. A) I and IV B) II and IV C) I and III D) II and III - CORRECT ANSWER A) I and IV B) II and IV C) I and III✅ D) II and III The Bond Buyer 20 bond index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, and each with approximately 20 years to maturity. The index is updated each week. Pass-through securities are issued by all of these except Historic rehabilitation and government-assisted housing are two programs that offer potential tax credits. Tax credits are no longer available for equipment leasing, and while developmental oil and gas programs offer high intangible drilling costs, these are not investment tax credits. All of the following statements regarding Government National Mortgage Association (GNMA) pass-through securities are true except A) GNMAs are considered to be the riskiest of the agency issues. B) investors receive a monthly check representing both interest and a return of principal. C) investors own an undivided interest in a pool of mortgages. D) the minimum initial investment is $1,000. - CORRECT ANSWER A) GNMAs are considered to be the riskiest of the agency issues.✅ B) investors receive a monthly check representing both interest and a return of principal. C) investors own an undivided interest in a pool of mortgages. D) the minimum initial investment is $1,000. GNMA securities, which are backed by the full faith and credit of the U.S. government, are considered to be the safest of the agency issues. As is the case with most agencies, the minimum denomination is $1,000. Index options differ from equity options in which of the following ways? A) They are subject to closing purchases as well as closing sales. B) The expiration date is the third Friday of the expiration month. C) The exercise settlement is in cash. D) The trade settlement date is the next business day. - CORRECT ANSWER A) They are subject to closing purchases as well as closing sales. B) The expiration date is the third Friday of the expiration month. C) The exercise settlement is in cash.✅ D) The trade settlement date is the next business day. When an index option is exercised, cash is paid to the option holder for the amount in the money. In contrast, exercising an equity option involves delivering the underlying stock. Both index options and equity options have the same expiration date and the same trade settlement date. Closing transactions can be purchases or sales for any option, regardless of the underlying asset. A corporate bond pays interest on a J/J 15 schedule. An investor purchasing these bonds on Friday, April 17, would pay accrued interest for A) 95 days. B) 91 days. C) 92 days. D) 96 days. - CORRECT ANSWER A) 95 days. B) 91 days. C) 92 days. D) 96 days.✅ A J/J 15 schedule means the bond pays interest on January and July 15. Corporate (and municipal) bonds count each month as 30 days. As with all bonds, the accrued interest is paid from the previous interest payment date up to but not including the settlement date. A trade made on Friday the 17th settles the following Tuesday (T+2), April 21. The previous interest payment was January 15. Do the following simple calculation: Settlement date of 4/21 Minus last interest - 1/15 Result is 3/06, or 3 months plus 6 days With each month being 30 days, the answer is 90 + 6 or 96 days. The writer of an IRX U.S. Treasury bill yield-based option, if exercised, must A) deliver cash equal to the intrinsic value of the contract. B) receive cash.equal to amount the contract is in-the-money C) receive Treasury bills D) deliver T-bills.equal to the dollar amount of T-bills in the contract - CORRECT ANSWER A) deliver cash equal to the intrinsic value of the contract.✅ B) receive cash.equal to amount the contract is in-the-money C) receive Treasury bills D) deliver T-bills.equal to the dollar amount of T-bills in the contract The IRX is the 13-week Treasury bill. It is generally accepted that this security, more than any other, directly reflects changes in interest rates. Investors in yield- based options are making a bet on the future trend of interest rates. Just as with equity options, we use the phrase "call up and put down." That is, if the investor believes interest rates will rise, the strategy is to buy a call option. If a decline in rates is expected, the investor will buy a put option. Like some other of the non- equity based options, upon exercise, yield-based options settle in cash. That is because there is no delivery of the underlying security. If you buy an IRX call and exercise it, you're not going to be buying Treasury bills. The writer must deliver the in-the-money amount in cash. Which of the following is not generally associated with an existing real estate direct participation program? A) Appreciation potential B) Immediate income stream C) Known history of income and expenses D) Lower risk than other types of real estate programs - CORRECT ANSWER A) Appreciation potential✅ B) Immediate income stream C) Known history of income and expenses D) Lower risk than other types of real estate programs Appreciation potential is generally not associated with existing real estate programs because most appreciation occurs in the earliest years for real estate assets. What type of order provides that market activity can cause activation, but it is possible that the trade itself may or may not be executed? A) A stop limit order B) A market order C) A stop order D) An open buy order - CORRECT ANSWER A) A stop limit order✅ B) A market order C) A stop order D) An open buy order With a stop limit order, if the stock price trades at or through the specified stop price, the order will be triggered or activated and become a limit order. But remember, a limit order may not be executed because the limit price may never be reached.