D2 - Practice Exam Flashcards
1
Q
Mark Schwimmerr owns 2,500 shares of TP Corporation. Which Of the following actions would dilute Mark’s equity?
I. Primary share offerings (registered)
II. A stock split
III. Payment of a stock dividend
IV. Secondary share offerings (registered)
A) I only
B) II only
C) I, II, and IV
D) I, II, III, and IV
A
A.
Another primary issue of shares would dilute Mark’s ownership because new shares would be coming to the market. Don’t forget that when a corporation issues stock
dividends, splits its stock, or makes a secondary offering, the percent of equity does not change.
2
Q
Mike Smith is one of your clients. Mike is 55 years old, has a wife, two young adults going to college, and two children living at home. You have helped Mike determine his
investment profile and how much risk he should be willing to take. However, Mike is hot on a particularly speculative security that doesn’t fit his investment profile. Mike calls
you saying he wants to purchase $20,000 worth of this security. What should you do?
A) Accept the order and mark it as unsolicited.
B) Refuse the order because it doesn’t fit his investment profile.
C) Do nothing until talking to a principal.
D) Limit Mike’s exposure by making sure that he doesn’t purchase more than $5,000 worth of this speculative security.
A
A.
You can accept the trade and mark it as unsolicited. Even if a customer wants to purchase a security that doesn’t fit his investment profile, you can still accept it in most cases by marking it as unsolicited. I call this the CYD (cover your derriere) rule. As long as you mark the ticket as unsolicited, you save yourself some aggravation (and maybe arbitration) if Mike loses money on the deal.
3
Q
- An investor would like to save money for
a child who will be going to college in
15 years. Which of the following is a suitable
investment?
(A) T-bills
(B) T-notes
(C) Treasury receipts
(D) AAAA aggressive growth fund
A
- C. (Chapter 7) T-strips or Treasury receipts are long-term zero-coupon bonds backed by
the full faith and credit Of the U.S. government. Zero-coupon bonds are ideal investments
to plan for future events because investors don it face reinvestment risk. Reinvestment risk
is the additional risk taken with interest or dividends received. Since holders of Treasury
receipts don’t receive interest payments, there is nothing to reinvest. In addition, the
purchase price for long-term coupon bonds is comparatively IOW.
4
Q
- Which of the following statements is TRUE
about revenue bonds?
(A) Their value is measured by the munici-
pal project ‘s capacity for generating
revenue.
(B) They are secured by a mortgage-backed
bond.
(C) They are a type of general obligation
(D) They are subject to the Statutory debt
limitations Of the issuing jurisdiction.
A
- A. (Chapter 8) The SIE examiners want to see that you can distinguish revenue bonds from
general obligation bonds. In this question, Choice (A) is the correct answer. Revenue bonds
are backed by a project’s earning capacity. Choices (B), (C), and (D) are incorrect because
revenue bonds are not secured by a specific pledge of property, are not a type of general
obligation bond, and are not subject to debt limitations the way that many general obliga-
tion bonds are.
5
Q
- Which Of the following is the balance sheet
equation?
(A) assets = liabilities + shareholder’s equity
(B) assets liabilities = shareholder’s equity
(C) shareholder’s equity + assets = liabilities
(D) none of the above
A
- A. (Chapter 13) When you look at a corporation’s balance sheet, the left-hand side lists all
the assets and the right-hand side lists all the liabilities plus the shareholders’ equity. The
left side and the right side balance out (equal the same amount Of money).
6
Q
- Regarding the taxation of dividends from cor-
porate securities, which TWO Of the following
are TRUE?
l. (Ulified dividends are taxed at the
investor’s income-tax rate.
Il. (Ulified dividends are taxed at a maxi-
mum rate of 20 percent.
. Nonqualified dividends are taxed at the
Ill
investor’s tax rate.
Nonqualified dividends are taxed at a
IV.
maximum rate of 20 percent.
(A) 1 and 111
(B) 1 and IV
11 and 111
(C)
(D) Il and IV
A
- C. (Chapter 15) Dividends are profits shared by corporations. Dividends can be taxed as
either qualified (up to a maximum rate of 20 percent) or nonqualified (according to the
investor’s tax bracket). In order for the dividends to be qualified, the investor must have
held onto the stock for at least 61 days. The 61-day holding period starts 60 days prior to
the ex-dividend date.
7
Q
- Where can an investor find the most informa-
tion about a new municipal issue?
(A) In a prospectus
(B) In an official statement
(C) In a tombstone ad
(D) In a registration statement
A
- B. (Chapter 8) An official statement includes all relevant information about a new munici-
pal bond. Municipal bonds don’t have a prospectus, but an official statement is along the
same lines. An Official statement gives information about the municipal issue, such as the
reason the bonds are being issued, what revenue is going to be used to pay the bonds, the
issuer’s payment history, and so forth. A tombstone ad is a brief advertisement that does
not go into detail about the security being issued, and a registration statement is used by
corporations when they are filing With the SEC.
8
Q
- Which of the following statements made by a
registered rep is not prohibited?
(A) “The stock will double in price.”
(B) “The earnings of the company will be
better than expected.
(C) “I can guarantee that you will not lose
money on this stock
(D) “A research report shows that the com-
pany’s financial performance may be
better than expected.
A
- D. (Chapter 16) This question is a double negative (“not prohibited”), so it’s asking which
statement a registered representative can make. The answer is pretty much a matter of
logic. Choices (A), (B), and (C) are all guarantees. A registered rep who makes guarantees
may get into trouble. However, Choice (D) is not a guarantee and may be said to an investor
as long as it’s true.
9
Q
- Which tv.’0 of the following are true of Roth
IRAs?
l. Contributions are made from after-tax
dollars.
ll. Contributions are made from pretax
dollars.
Distributions are tax-free.
Ill.
Distributions are taxed on the amount
IV.
above the amount of the contribution.
(A) 1 and 111
(B) 1 and IV
(C) 11 and
11 and r,’
(D)
A
- A. (Chapter 15) The main difference between traditional IRAs and Roth IRAs is the tax
implications. Contributions to traditional IRAs are made from pretax dollars (you can write
them off on your taxes), whereas contributions to Roth IRAs are made from after-tax
dollars (you can’t write them Off on your taxes). However, distributions (withdrawals) from
traditional IRAs are taxed on the amount withdrawn, Whereas withdrawals from Roth IRAs
are tax-free. When withdrawing from a Roth IRA, neither the amount invested, which was
already taxed, nor the amount the account has gone up in value (appreciation) is taxed,
which is a great benefit to Roth IRA holders.
10
Q
- Which of the following are true of broker-
dealer business continuity and disaster recov-
ery plans?
l. They must be in written form.
ll. Firms must have back-up of data (both
hard copies and electronic).
Ill. Firms must have some sort of alternative
communication between the firm and its
employees.
IV. They must be approved by a principal.
(A) 1, 11, and 111
(B) 11, m, and w
(C) 1, 11, and IV
(D) 1, 11, 111, and IV
A
- D. (Chapter 16) All firms must now have business continuity and disaster recovery plans to
be prepared in the event of a significant disruption in their business. These plans must be
in written form, be approved by a principal, and address the following information;
The existence Of back-up data
* A means of alternative cornmunication between a firm and its employees, customers. and
regulators
* The creation of an alternative bcation for all employees
* A means of giving customers fast access to their securities and funds
11
Q
- One of your clients wants to start adding
some diversity to her portfolio by investing in
mutual funds. Which of the following is the
most important consideration when choosing
a mutual fund?
(A) Whether the fund is load or no-load
(B) Management fees
(C) Investment objectives
(D) 12b1 fees
A
I l. C. (Chapter 9) Certainly all the choices listed are important, but the most important one is
the investment objectives of the mutual fund. In other words, you need to know whether
the investor is looking for a growth fund, an income fund, a municipal bond fund, an
intemational fund, and so on. When comparing funds with the same investment objectives,
all the other things, such as comparing management fees, whether the fund is load or
no-load, and so on, come into play.
12
Q
- Common stockholders in a corporation can do
which of the following?
(A) Elect the corporation’s board of directors
(B) Make decisions about the day-to-day
dealings, such as the office supply dealer
used by the corporation
(C) Receive interest payments
(D) Expect to be paid par value for their
stock if the corporation goes out of
business
A
- A. (Chapter 6) Common stockholders may cast votes for candidates to be members of the
board of directors; therefore, Choice (A) is the correct answer. Choice (B) is incorrect
because while common stockholders may vote on important issues that affect the welfare of
the corporation, they do not have voting rights on the day-to-day operations of the
corporation, like buying office supplies. Choice (C) is incorrect because a stockholder
doesn ‘t receive interest payments, bondholders do. Finally, Choice (D) is incorrect because
a common stockholder’s initial investment can lost if a corporation fails; therefore, par
value is not guaranteed.
13
Q
- Which Of the following investments are suita—
ble for a 21 -year- Old investor who has limited
resources but would like to start investing on a
regular basis?
l. Growth funds
Il. Raw land DPP
Ill. call options
Hedge funds
IV.
(A) I only
(B) 11 and IV
(C) 1, 11, and
1, 111, and IV
A
- A. (Chapter 9) The clues in this question are that the investor is 21 years old, has limited
resources, and would like to start investing on a regular basis. *mis investor is screaming
out to be put in a mutual fund. upically, investors of mutual funds are in it for the long
haul; they’re not in and out like they may be With other investments. Ideally, this investor
should probably be set up on a dollar cost averaging plan whereby he invests x amount of
dollars every so often (for instance, Sloo once a month). Because this investor is young, he
can take a little more risk, so a growth fund would be ideal. DPPs, buying call options, and
hedge funds are too risky, require too much money, and/or require a certain degree of
soph istication.
14
Q
- Melissa purchased 1,000 shares of DDD com-
mon stock at SQ per share on January On
January Of the following year, Melissa sold
the shares at S46 per share. W’hich TWO Of the
following are TRUE?
I. It Will be taxed as a short-term capital
gain.
It will be taxed as a long-term capital
The gain will be taxed at Melissa’s tax
Ill.
bracket.
IV.
The gain will be taxed at a maximum of
20 percent.
(A) land
(B) 1 and IV
(C) 11 and 111
(D) 11 and IV
A
- A (Chapter 15) Since Melissa sold the stock at a profit, she would be subject to capital gains
tax. In order to be a long-term capital gain, she would’ve had to have held the stock for
over one year. In this case, she only held the stock for exactly one year so it would be a
short-term capital gain, which would be subject to taxes at Melissa’ s tax bracket.
15
Q
- Which of the following statements is TRUE
regarding municipal revenue bond issues?
(A) The bonds are backed by the issuer’s
unlimited taxing power.
(B) User fees provide revenue for the
municipality to make sure they can pay
bondhold ers.
(C) The bonds’ feasibility is not dependent
on the earnings potential of the facility
or project.
(D) Revenue bonds are most suitable for
investors with high risk tolerance.
A
- B. (Chapter 8) The answer is Choice (B). Choices (A), (C), and (D) are incorrect. Revenue
bonds are generally considered low-risk because they’re issued by municipalities. The
riskiest municipal bonds are IDRS (industrial development revenue bonds), which are
backed by a corporation, not the municipality.
16
Q
- Jameson and Johnson Securities sent Art a
confirmation of his latest trade Of Johnstone
Corporation common stock. WIIich of the fol-
lowing items should be on the confirmation?
I. The trade date and the settlement date
ll. Whether Jameson and Johnson acted as
an agent or a principal
Ill. The name of the security and how many
shares were traded
IV. The amount of commission paid if
Jameson and Johnson acted as an agent
(A) I and Ill
(B) 1, 11, and 111
(C) 1, 111, and IV
(D) 1, 11, 111, and IV
A
- D. (Chapter 16) When a client receives a trade confirmation (receipt of trade), the confirma-
tion must show the trade date, settlement date, the name Of the security, how many shares
were traded, whether the broker- dealer acted as an agent or principal, and the amount of
commission if traded on an agency basis.
17
Q
If a customer, Jessica James, decides to give
limited power of attorney to her registered
representative, Which of the following is
TRUE?
(A) The registered representative still needs
verbal authorization from Jessica for
each trade.
(B) Jessica must sign a power-of-attorney
document.
(C) The registered representative must sign
a power- Of- attorney document.
(D) Jessica must initial each order before it
is entered.
A
- B. (Chapter 12) The correct answer is Choice (B) because when Jessica grants her registered
representative a limited power of attorney, she is the one Who must sign the document.
Although a principal must approve before the registered representative exercises his
discretionary authority, the registered representative does not have to sign the document,
and Jessica’s approval Of each order is not required.
18
Q
- Which of the following is NOT a characteristic
Of a real-estate investment trust (REIT)?
(A) Pass-through treatment Of income only
(B) Pass-through treatment of income and
losses
(C) At least 75 percent of the assets must be
invested in real-estate -related projects
(D) Ownership Of real property without
management responsibility
A
- B. (Chapter 10) Real-estate investment trusts pass through income earned by the real-
estate investments, but not losses. Real -estate limited partnerships pass through income
and losses to investors DPPs aren’t responsible for paying business taxes.
19
Q
- A principal is responsible for approving new
accounts opened for
l. individuals
ll. corporations
. banks
IV. trusts
(A) I only
(B) land 11
(C) 1, 11, and 111
(D) 1, 11, m, and IV
A
- D. (Chapter 16) I hope this was an easy one for you. Principals must approve all new
accounts and must sign all new account forms.
20
Q
- George Lincoln opens a margin account and
signs a loan consent, hypothecation, and credit
agreement. Which of the following statements
are TRUE?
l. George’s stock may not be kept in street
ll. A portion of George’s stock may be
pledged for a loan.
Ill. George will be required to pay interest on
the money borrowed.
IV. George’s stock must be cosigned by the
broker/dealer.
(A) land IV
(B) 11 and 111
(C) and 11
(D) None of the above
A
- B. (Chapter 12) Because George is borrowing money through a margin account to purchase
securities, he must leave the stock in the broker-dealer’s safekeeping, pay interest on the
loan, register the stock in street name, and agree to allow the broker-dealer to pledge the
securities because he signed a loan consent agreement.
21
Q
- To protect investors of variable life insurance
policies who become disabled, there is a rider
called a(n)
(A) disability rider
(B) waiver Of premium
(C) early withdrawal rider
(D) none of the above
A
- B. (Chapter 9) Variable life insurance IX)Iicies often have a rider Or Statement Of condition
that allows individuals to keep their policy in force if they become disabled. This waiver of
premium forgives policyholders of paying additional premiums if they become totally
disabled.
22
Q
- As a client’s investment objectives change,
a registered rep should keep track of those
changes so that he can rebalance the client’s
portfolio and make proper recommendations.
Which of the following changes may affect a
customer’s investment objectives?
l. Growing older
ll. Getting divorced
Ill. Having triplets
IV. Getting a higher paying job
(A) land 111
(B) 1, 11, and 111
(C) 11, 111, and IV
(D) 1, 11, 111, and1V
A
- D. (Chapter 12) Certainly just about anything you can think of could change a client’s
investment objectives. As people get older, they usually can’t take as much risk. Conversely,
investors Who get higher-paying jobs are likely to want to take additional risk. Someone
who is getting (or has gotten) divorced is likely to have less money (due to alimony pay-
ments, one person paying for the house instead of two, child support payments, and so on).
Obviously, having triplets puts a financial burden on an investor (unless she gets a reality
show).
23
Q
- JKLM Corporation has declared a so.’o divi-
dend payable to shareholders Of record on
Thursday, September 14. What would happen
to the opening price of JKLM on Wednesday,
September 13?
(A) It would be reduced by the amount of the
dividend.
(B) It would remain the same.
(C) It would be increased by the amount of
the dividend.
(D) Cannot be determined
A
- A. (Chapter 6) Remember, the ex-dividend date (the first day the stock trades without
dividend) is one business day before the record date. In this case, the record date is Thurs-
day, Septemtkr 14, which makes the dividend date Wednesday, September 13. The
opening price on the ex-dividend date is reduced by the amount Of the dividend ($0.40 in
this case).
24
Q
- Larry Eagle is a resident of Michigan. Mr.
Eagle purchased a Michigan municipal bond.
What is the tax treatment Of the interest that
Larry earns on his Michigan bond?
I. It is exempt from local taxes.
Il. It is exempt from State taxes.
Ill. It is exempt from federal taxes.
(A) 111 only
(B) land 111
(C) 11 and 111
(D) 1, 11, and 111
A
- D. (Chapter 8) When you purchase a municipal bond issued within your home State, the
interest you receive is triple-tax-free (exempt from federal, state, and local taxes). In
addition, if you purchase a bond issued by a U.S. territory (such as Puerto Rico, U.S.
Islands, Guam, Samoa, and Washington, D.C.), the interest is triple-tax-free. However,
you purchase a bond issued by another state, the interest is exempt from federal taxes
25
Q
- Who is responsible for paying the taxes when
securities in a Uniform Gifts to Minors Act
(UGMA) account are sold at a profit?
(A) The minor
(B) The donor
(C) The custodian
(D) The parent or guardian
A
- A (Chapter 12) The correct answer is Choice (A). All taxes on the account are the
bility Of the minor because the UGMA account was opened for the benefit Of the minor
the account is registered with the minor’s Social Security number.
26
Q
- An investor wants to invest in a DPP that’s
relatively safe. Which of the following are you
LEAST likely to recommend?
(A) A real-estate partnership that invests in
raw land
(B) An oil and gas developmental program
(C) An Oil and gas income program
(D) An equipment leasing program
A
- A (Chapter 10) Of the choices listed, a real-estate partnership that invests in raw land B
the riskiest. partnerships that invest in raw land are considered speculative, as are oil
gas wildcatting (exploratory) programs. The risk of investing in raw land is that even
though the property is purchased at a low price, developers may not be interested in thz
area and the partnership may be stuck with relatively worthless property.
27
Q
- Which of the following is a function of a
transfer agent?
(A) Underwriting shares in new corporate
stock offerings
(B) Preparing corporate balance sheets
(C) Advising municipalities regarding the
debt structure of new issues
(D) Sending out proxies
A
- D. (Chapter 6) Hopefully the word “transfer” in “transfer agent” led you to the correct
answer. Yes, the transfer agent is responsible for transferring or sending thinB.
28
Q
- All the following information is required on a
preliminary prospectus EXCEPT
(A) the final Offering price
(B) the purpose for which the issuer is rais-
ing the funds
(C) a statement in red lettering stating that
items on the preliminary prospectus are
subject to change before the final pro-
spectus is issued
(D) the issuer’s history and financial Status
A
- A (Chapter 5) The final offering price would not be found on the preliminary prospectus
(red herring) because the price hasn’t tæen finalized at this point. After the issuer and the
syndicate manager come up with a final offering price, they place it on the final prospectus.
29
Q
- Which Of the following situations requires a
broker-dealer to file a currency transaction
report?
(A) A customer purchases s20,000 worth of
stock with a check from a joint account.
(B) A customer opens an account With
Sl/„ooo cash.
(C) A customer opens an account with a Wire
transfer from his personal account for
S25,ooo.
(D) A customer deposits corporate bonds
with a par value of $30,000.
A
- B. (Chapter 16) When determining whether a broker-dealer has to file a currency transac-
tion report (CrR), you need to look at the size of the trade first. Any cash or cash-
equivalent (for example, a money order) transaction of SIO,OOO or more requires that you
file a CPR to FinCEN (the U.S. Treasury Financial Crimes Network) to determine whether it
may be money laundering. In Choice (B), the investor is depositing S14,000 in cash, which
is over the SIO,OOO threshold. In addition, an SAR (Suspicious Activity Report) must be filed
for any transaction of $5,000 or more for any trade Or transfer that just looks suspicious.
