Chapter 1 Flashcards
Under this rule RRs must use due diligence when obtaining essential information to open and service a customers account.
Know your customer (KYC)
Must send copy of the customer profile or account record to the customer within how many days of the account opening?
30 days or with next statement
Updates and account information verification must be sent to the client at least how often?
36 months
Prior to making any suitable customer recommendations, a RR should :
Know their customer
Earned income includes:
Wages, salary, net earnings from self employment, tips, any employee compensation taxable
Passive income includes:
Rents, royalties, stakes in limited partnerships, business activities in which individual does not materially participate
Investment income includes:
Interest, dividends, capital gains
——— are a resource with economic value that client owns or controls with the expectation that they will provide a benefit. Can generate cash flow.
Assets
______ represent a clients debt or obligations and refer to any money or service that is currently owed to another party.
Liabilities
Formula to calculate Net worth
Assets-liabilities
____is the investors attitude toward a negative change in the value of their invested portfolio and is important part of the investor profile.
Risk tolerance
Short term needs recommendations
Money market funds, certificates of deposit, short term bonds
Long terms needs recommendations
Small and mid cap stocks, growth stocks or funds, international stocks or funds.
_____ is the frequency and size of fluctuations in a securities value compared to changes in the over all market. Measure with Beta.
Volatility
Volatility measure of the overall market
1.0
What type of security has been shown to hedge against inflation?
Stocks
What type of investors are hardest hit by inflation?
Fixed-income
Recommending a client hold a position that is unsuitable could be a violation of what rule?
Know your customer rule and FINRA rule 2111
FINRA RULE 2111 3 Main suitability obligations :
Reasonable basis , customer specific, quantitative
Firms must have a reasonable basis to believe, based on adequate due diligence, that a recommendation is at least suitable to some investors:
Reasonable-basis suitability
Firms must have reasonable grounds to believe a recommendation is suitable for that specific investor based on profile:
Customer-specific suitability
Firms must have a reasonable basis to believe the number or size of recommended transactions within a certain period is not excessive
Quantitative-suitability
If investors goal is capital preservation they are : conservative or aggressive?
Conservative
If a customer is seeking a goal of tax exempt income what would be a favorable recommendation?
Municipal bond
If an investor is seeking an investment to provide income what would be suitable?
Bond ( interest) and stock ( dividend)
High yield bond if looking for higher return with greater risk
Investors goal is capital appreciation (growth) what would be suitable?
Portfolios consistent largely of growth companies is large and mid-cap company equity
Investor seeking aggressive growth would recommend:
Shares of smaller companies, sectors involved in development and research such as biotechnology, and international stocks.
Investor seeking growth and income objective goal would be recommended:
Portion of portfolio common stocks for growth and dividend paying stock ( blue chip common and preferred) and bonds such as investment grade corp and US government bonds
If an investor states objective is speculative what would be an example to recommend:
Extremely risky. Day trading, investing in hedge funds, or micro-cap stocks
The risk that an investments value will change inversely to changes in the general economic interest rates:
Interest-rate risk
____ is the tool used to determine the price sensitivity of a bond based on a small interest rate change:
Duration
The risk that future proceeds will have to be reinvested at a lower potential interest rate :
Reinvestment-risk
Risk when the general prices in the overall economy are rising : money will buy less in the future:
Inflation risk (purchasing power risk)
The risk that occurs as the value of the foreign currencies fluctuate against the US dollar and these fluctuations can result in a loss of value in any investment that have ties to foreign economies:
Currency ( exchange rate) risk
Risk of losing some or all the capital used to purchase an investment:
Capital risk
The risk that a company will not have adequate cash flow to meet its operating expenses:
Business risk ( selection risk)
The risk that an investment may lack marketability, meaning it cannot be sold quickly enough to prevent or minimize a loss or benefit from a potential gain:
Liquidity
The risk when the possibility that an issuer will be unable to pay back the interest or principal due to its creditors:
Credit-risk
The risk of possibility that a bond or preferred stock will be redeemed by the issue were before the stated maturity:
Call risk
Risk that exists when tax laws change causing unfavorable tax consequences to certain securities investors:
Taxation risk
A concern for high income investors. Determines that their tax liability they have to pay that higher of the two amounts.
Alternative minimum tax. (AMT)
The risk that regulations in a specific industry will change and adversely affect corporations in that industry:
Regulatory risk
Risk of a change in the law that can have a major impact on the companies business prospects.
Legislative risk
The risk that an investment returns could suffer because of political changes social events instability and a country or region
Social or political risk
The risk that an existing loan will be paid off earlier than anticipated.
Prepayment risk
The risk that a loan will be paid off longer than anticipated.
Extension risk
The risk of buying or selling an investment at the wrong time and missing higher gains.
Timing risk
An investor purchases 1000 shares of XYZ stock. What risk does this investor face?
Business risk
An older client is seeking current income has substantial annual income and is risk averse. Based on this information which of the following is the most suitable recommendation for the client? A.) municipal bond fund b.) high yield corp bond c.) equity income fund d.) balanced fund
A.) municipal bond fund
Which of the following bonds will have the highest duration? Bond with five year maturity and 8% coupon. Bond with five year maturity and 5% coupon. Bond with 10 year maturity and 8% coupon. Bond with 10 year maturity and 5% coupon.
Bond with 10 year maturity and 5 percent coupon
True or false. The longer the bonds maturity the greater the interest rate.
True
What type of investment has no purchasing power risk? Corporate bonds. Preferred stock. Treasury notes. Tips.
TIPS
True or false. Duplicate statements may not be sent unless written consent from the owner of each account has been obtained.
True
Formula to determine disposable income?
Yearly income minus tax rate.
Formula to determine discretionary income:
Total income-tax bracket- expenses
A client and saving money to take a cruise with their former college roommate and eight months. The client is looking to invest their vacation savings and hopes to generate double digits over the next eight months. Which of the following should be recommended? Money market, aggressive growth fund, junk bond, call options.
Money market
