Exam 3-7

Question 1

What is the riskiest option strategy?
A. Selling naked calls
B. Buying calls
C. Selling naked puts
D. Buying puts

Answer 1

CORRECT ANSWER IS: A (Selling Naked Calls)

Because of the maximum unlimited loss potential, selling naked (uncovered) calls is the riskiest option strategy. Theoretically, the stock price could go to $1,000,000 a share and you have to go out and buy 100 shares at that price if the option is exercised. Your second choice, sell naked puts, your max loss would be the strike price- premium received because you have to purchase the shares.

Question 2

If the Fed buys securities in the open market, they Fed would most likely be doing this to:
A. Increase the money supply
B. Decrease the money supply
C. Tighten credit
D. Increase interest rates

Answer 2

CORRECT ANSWER IS: A (Increase the Money Supply)

If the Fed buys securities from banks, the Fed is adding to the money supply and easing credit.

Question 3

Which of the following is not a direct obligation of the US Government?
A. T-bonds
B. T-strips
C. GNMA
D. FNMA

Answer 3

CORRECT ANSWER IS: D (FNMA)

FNMA’s (Fannie Mae’s) are government agency bonds, which are a moral obligation of the US
Government.

Question 4

Scott Avett has 1,000 shares of APPLEat $50 per share. The computer company announces a 2 for 1 stock split. Assuming no change in the price of the stock, what would John’s position be after the split?
A. 500 shares at $100 per share
B. 1,000 shares at $100 per share
C. 2,000 shares at $50 per share
D. 2,000 shares at $25 per share

Answer 4

CORRECT ANSWER IS: D (2,000 shares at $25 per share)

If it is a 2 for 1 split, John would have 2 shares for every one that he owned before. If the shares double, the market price has to be cut in half.
(1,000 shares x 2) / 1 = 2,000 / 1 = 2,000 shares ($50 price x 1) / 2 = $50 / 2 = $25 per share

Question 5

A firm purchased a NASDAQ stock at 11 and the inside market is 10 - 10.63. Which price could the firm use as a factor in determining the markup charge to a customer buying the stock?
A. 10
B. 10.63
C. 11
D. 11 plus a commission

Answer 5

CORRECT ANSWER IS: B (10.63)

According to the 5% Markup Policy, the dealer cost of 11 cannot be used as a factor to determine the markup charged to a customer. Charges on transactions must be based on the inside market (bidask). Since the customer is buying the stock, the lowest ask price of 10.63 would be the price.

Question 6

Who guarantees that an option will always be exercised at a customer’s request?
A. The OBO
B. The OAA
C. The OCC
D. The CBOE

Answer 6

CORRECT ANSWER IS: C (The OCC)

The OCC (Options Clearing Corp.) is the issuer and guarantor of all listed options. CBOE is the
exchange where options are traded!

Question 7

In 1996, Joe Kwon invested money into a non-qualified annuity. The original amount invested was $25,000, but the annuity has increased in value to $37,000. Mr. Kwon would like to withdraw $17,000. What would be Mr. Kwon’s tax liability for this transaction if he is in the 30% tax bracket?
A. $3,000
B. $3,600
C. $5,000
D. $11,100

Answer 7

CORRECT ANSWER IS: B ($3,600)

If Joe invested $25,000 into a non-qualified annuity, the $25,000 invested has already been taxed. NOTE: assume that annuities are non-qualified unless otherwise stated. Joe would only be taxed on the amount withdrawn over $25,000 (the amount he already paid taxes on!). Joe’s annuity has
increased to $37,000. He’s got $12,000 of income earned ($37,000 - $25,000); and he can only be taxed on that $12,000. If he withdraws $17,000, $12,000 will be taxed and $5,000 will not.

$12,000 x 30% = $3,600 tax liability

Question 8

All of the following are types of municipal notes EXCEPT:
A. RAN
B. AON
C. CLN
D. PN

Answer 8

CORRECT ANSWER IS: B (AON - All Or None)

RANs (Revenue Anticipation Notes), CLNs (Construction Loan Notes) and PNs (Project Notes) are all types of municipal notes (typically “bridge” loans). AON (All Or None) is entered on an order ticket or is a type of underwriting in which the entire offering
must be sold or the offering is canceled.

Question 9

All of the following are true about stop orders EXCEPT:
A. They may protect short positions
B. They may protect long positions
C. They give the DMM discretion
D. They can be executed at any price

Answer 9

CORRECT ANSWER IS: C (They give the DMM Discretion)

A stop order does not give a DMM discretion (power attorney) to decide how or when to execute an order for a customer. The order ticket will identify the price that the order should be triggered or
activated.

Question 10

All of the following are part of a CMO EXCEPT:
A. GNMA
B. FNMA
C. SLMA
D. FHLMC

Answer 10

CORRECT ANSWER IS: C (SLMA - Sallie Mae)

CMOs (Collateralized Mortgage Obligations) diversify between GNMA, FNMA and FHLMC. SLMA (Sallie Mae) is an agency that issues bonds to fund student loans; they went public and became tradable about 20 years ago.

Question 11

Which NASDAQ level shows only the highest bid and lowest ask prices?
A. Level I
B. Level II
C. Level III
D. Level IV

Answer 11

CORRECT ANSWER IS: A (Level I)

Level I access on the NASDAQ shows the inside market of each security (highest bid and the lowest
ask).
-Level II shows firm quotes entered by all market makers.
-Level III is where the market makers enter their quotes.
-Level IV is institutional to banks.

Question 12

If the value of the US dollar appreciates, all of the following are false EXCEPT:
A. Foreign imports of foreign goods are more competitive
B. US imports of foreign goods are less competitive
C. US imports of foreign goods will increase
D. US exports will increase

Answer 12

CORRECT ANSWER IS: C (US Imports of Foreign goods will increase)

This question has a double negative (false & EXCEPT), so you are looking for a trueanswer to this question. If the US dollar appreciates in value as compared to foreign currency, the US dollar would be strong and the dollar would be able to buy more foreign goods (remember, use a simple real life example – if the dollar appreciates I can buy more cookies from France for the same total $ cost).

Question 13

Arrange the following in order from largest to smallest:
I. Underwriting spread
II. Re-allowance
III. Selling Concession
A. II, III, I
B. III, II, I
C. I, II, III
D. I, III, II

Answer 13

CORRECT ANSWER IS: D (I,III,II)

Use “So Tom Can’t Remember More” to help remember the order from largest to smallest.
1. Spread
2. Takedown
3. Concession
4. Reallowance
5. Manager’s fee

Question 14

A customer has $350,000 in securities and $200,000 in cash with a broker-dealer at the time the broker-dealer declares bankruptcy. How much would the investor be covered for according to SIPC?
A. $450,000 total
B. $500,000 total
C. $550,000 total
D. Nothing: the investor would become a general creditor of the firm

Answer 14

CORRECT ANSWER IS: B ($500,000 total)

Customers are covered up to $500,000 total; with no more than $250,000 in cash (this is an increase in recent years from $100,000). This customer would be covered for $350,000 in securities and $150,000 of cash ($500,000 total).

Question 15

All of the following have reinvestment risk EXCEPT:
A. T-bonds
B. T-notes
C. T-strips
D. GNMAs

Answer 15

CORRECT ANSWER IS: C (T-Strips)

Reinvestment risk is the additional risk taken with interest and dividends received. T-bonds, T-notes and GNMAs all make interest payments. T-strips, T-bills, and zero-coupon bonds have no reinvestment risk since they make no payments until maturity.

Question 16

In a municipal underwriting, which of the following is the most likely scenario?
I. Revenue bonds sold on a negotiated basis
II. Revenue bonds sold on a competitive basis
III. GO bonds sold on a negotiated basis
IV. GO bonds sold on a competitive basis
A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 16

CORRECT ANSWER IS: B (I and IV)

Since G.O. bonds are backed by taxes, they are usually issued on a competitive basis to find the lowest cost to the municipality. Revenue bonds are not backed by taxes, so revenue bonds are more likely issued on a negotiated basis.

Question 17

Which of the following is not a payment plan for an annuity?
A. single payment immediate
B. single payment deferred
C. periodic payment deferred
D. periodic payment immediate

Answer 17

CORRECT ANSWER IS: D (Periodic Payment Immediate)

In order to receive immediate payment on an annuity, an investor must deposit a lump sum. There is no periodic payment immediate plan for an annuity. Otherwise, the customer could be receiving more than they’ve invested (potentially).

Question 18

When investors feel more confident when investing in sovereign debt, the yield spread between sovereign debt and US Government bonds would:
A. Narrow
B. Widen
C. Remain the same
D. Cannot be determined

Answer 18

CORRECT ANSWER IS: A (Narrow)

US Government bonds usually have lower yields than sovereign bonds because US Government bonds are usually safer. However, if investors are more confident with investing in foreign government (sovereign) bonds, investors would sell US Government bonds and invest in foreign government
bonds.

The prices of US Government bonds would decrease while the prices of sovereign bonds would increase. Since yields move in the opposite direction of prices, the yields of US Government bonds would increase, and the yields of sovereign bonds would decrease.
Therefore, the yield spread between US Government and sovereign bonds would narrow… “When people worry, the yield spread widens”.

Question 19

When does an option contract expire?
A. 3:00 PM CST on the 3rd Friday of the expiration month
B. 4:30 PM CST on the 3rd Friday of the expiration month
C. 10:59 CST on the 3rd Saturday of the expiration month
D. 11:59 EST on the 3rd Friday of the expiration month

Answer 19

CORRECT ANSWER IS: D (11:59 EST on the 3rd Friday of the expiration month)

Option contracts expire on the third Friday of the expiration month at 10:59PM CST (11:59 PM EST). offices may close earlier (more conservative) but not later (breaking the reg).

Question 20

What is the ad valorem tax for a person who has a house with a market value of $190,000 and an assessed value of $210,000, if the tax rate is 21 mills?
A. $3,990
B. $4,410
C. $5,550
D. $5,710

Answer 20

CORRECT ANSWER IS: B ($4,410)

Ad valorem taxes are the largest backing for GO bonds. Ad valorem taxes are based on the assessed value of the property (not market value). The assessed value is $210,000, with taxes based on mills (1mill = .001). The tax rate for this equation is 21 mills.
$210,000 x .001 x 21 = $4,410

Question 21

Which of the following would be considered the riskiest oil and gas DPP?
A. Income
B. Drilling
C. Balanced
D. Exploratory

Answer 21

CORRECT ANSWER IS: D (Exploratory)

Exploratory (wildcatting) programs are the riskiest oil and gas DPP’s. Exploratory programs drill in unproven areas and oil may never be found (never income producing).

Question 22

All of the following might be reasons why an investor would execute a bond swap EXCEPT:
A. A higher coupon rate
B. A shorter maturity
C. A better rating
D. A different denomination of certificates

Answer 22

CORRECT ANSWER IS: D (A different Denomination of Certificates)

A bond (tax) swap is performed to create a capital loss and yet maintain a similar position. Changing the denomination of the certificates does not help mitigate that risk.

Question 23

Use the following information to answer this question:
Public offering price - $21.00
Takedown - $1.50
Concession - $1.00
Re-allowance - $0.75
Managers fee - $0.50
If the selling group sells its entire allotment of 500,000 shares, how much does the syndicate make from the shares sold by the selling group?
A. $250,000
B. $375,000
C. $500,000
D. $750,000

Answer 23

CORRECT ANSWER IS: A ($250,000)

The syndicate members receive the takedown of $1.50 per share if selling stock on their own. The selling group receives the concession of $1.00 per share from the syndicate. The syndicate profits $0.50 per share for each share the selling group sells.
$1.50 - $1.00 = $0.50 per share
$0.50 x 500,000 shares = $250,000 profit for the syndicate on shares sold by the selling group

Question 24

When must an options account agreement be returned to the broker-dealer?
A. Prior to any trades being executed in the account
B. Before the principal can approve the account
C. Within 15 days after the approval of the account
D. At the time of the first trade

Answer 24

CORRECT ANSWER IS: C (Within 15 days after the approval of the account)

Options account agreements (OAA’s) must be signed and returned to the broker-dealer within 15 days after the approval of the account. And customers can make their first trade before then! ….it just can’t settle.

Question 25

Which of the following does a principal need to approve? I. New accounts II. Recommendations III. The prospectus IV. All trades in the account A. I only B. I, II, and IV C. I and IV D. II and III

Answer 25

CORRECT ANSWER IS: C (I and IV) A principal approves all new accounts and all trades in all accounts. Principals do not need to approve recommendations or prospectuses. The registered rep is responsible for making recommendations. In addition, a prospectus is reviewed by the SEC.

Question 26

Use the following information to answer this question: Public offering price - $21.00 Takedown - $1.50 Concession - $1.00 Re-allowance - $0.75 Managers fee - $0.50 How much does the issuer make if the entire issue is sold and the issue size is 2,000,000 shares? A. $38,000,000 B. $39,000,000 C. $40,000,000 D. $42,000,000

Answer 26

CORRECT ANSWER IS: A ($38,000,000) If the public offering price is $21.00 and the spread is $2.00, the issuer receives $19.00 per share. $21.00 - $2.00 = $19.00 per share to the issuer $19 x 2,000,000 shares = $38,000,000 to the issuer The issue needs to pay the syndicate and managers' fee! The selling concession is paid by the syndicate to the selling group if they engage one (or more).

Question 27

If a customer sells DEF common stock at a capital loss, which of the following purchases would not be a violation of the wash sale rule, if bought within 30 days of the sale? A. DEF common stock B. DEF preferred stock C. DEF call options D. DEF warrants

Answer 27

CORRECT ANSWER IS: B (DEF Preferred Stock) In order to avoid the wash sale rule, an investor cannot buy DEF common stock or any investment convertible into DEF common stock in the next 30 days. DEF preferred stock is not convertible into DEF common stock unless you see convertible preferred.

Question 28

Which of the following orders protects a short position? A. Buy stop B. Sell stop C. Buy limit D. Sell limit

Answer 28

CORRECT ANSWER IS: A (Buy Stop) Stop orders are used for protection. If a customer has a short position, they don’t want to pay a huge price to buy back the security. The customer would enter a buy stop order to protect the short position.

Question 29

Which of the following is not a progressive tax? A. Personal income B. Gift C. Estate D. Sales

Answer 29

CORRECT ANSWER IS: D (Sales) Progressive taxes are taxes that increase according to how much money is taxable. Personal income, gift, and estate taxes are progressive taxes. Sales tax and excise taxes (gas, alcohol, tobacco, etc.) are regressive taxes since everyone is taxed at the same rate. I.E. if I spend $100 at the grocery, sales tax is 8%; if I spend 10 at the grocery, sales tax is still 8%.

Question 30

Which of the following best describes the random walk theory? A. Fundamental analysts are usually right B. Technical analysts are usually right C. You can't make a determination on a company without an in-depth analysis of a company both technically and fundamentally D. The stock market is perfectly efficient

Answer 30

CORRECT ANSWER IS: D (The Stock Market is Perfectly Efficient) The Random Walk Theory (aka Dartboard Theory) believes that fundamental and technical analysis is useless in trying to find a security to purchase. According to the theory, the market is perfectly efficient since all information (public and private) is already reflected in its price.

Question 31

What is the market value of 10M T-bonds trading at 102:12? A. $1,021.20 B. $1,023.75 C. $10,212.00 D. $10,237.50

Answer 31

CORRECT ANSWER IS: D ($10,237.50) US Government bonds are quoted in 32nds. 102:12 = 102 12/32 = 102.375% of $1,000 par $1,023.75 x 10 bonds = $10,237.50

Question 32

The theory that states that the small investor is usually wrong is the: A. advance decline ratio B. short interest theory C. random walk theory D. odd lot theory

Answer 32

CORRECT ANSWER IS: D (Odd Lot Theory) Smaller investors trade odd lots which are trades of less than 100 shares in most cases. The odd lot theory states that analysts etc trade the opposite way of small investors.

Question 33

Place the following in order from highest to lowest priority: I. Group net II. Pre-sale III. Member IV. Designated A. I, II, III, IV B. II, I, IV, III C. II, I, III, IV D. III, II, I, IV

Answer 33

CORRECT ANSWER IS: B (II,I,IV,III) The normal allocation of orders is as follows: 1. Pre-sale 2. Group Net (Syndicate) 3. Designated 4. Member

Question 34

According to the “Know your customer rule”, a registered rep should know a customer’s: A. previous investment results B. investment objectives C. educational background D. previous employment

Answer 34

CORRECT ANSWER IS: B (Investment Objectives) The objectives or goals of a client are an important factor in determining recommendations. A rep must recommend a security or strategy that is based on the customer’s objectives. Prior investment experience is important, but not prior investment results as far as capital gains, capital losses, or ordinary income.

Question 35

An investor sells an WTF Sep 70 put for 5 and sells an WTF Sep 80 call for 4. If the investor closes the put for 4 and the call for 3, what is the gain or loss? A. $200 loss B. $200 gain C. $400 gain D. No gain or loss

Answer 35

CORRECT ANSWER IS: B ($200 Gain) First, put both premiums in the T-chart. To close, trade the opposite way of the previous trades. Since both options were sold, they are both purchased when closing transactions are executed.

Question 36

A customer would like to open a margin account with a purchase of 100 shares of RST stock at 34. How much must the investor deposit into the margin account? A. $1,500 B. $1,700 C. $2,000 D. $3,400

Answer 36

CORRECT ANSWER IS: C ($2,000) If this was an existing margin account, the investor would have to deposit the regulation T amount of the purchase. $3,400 x 50% regulation T = $1,700 Since this is a new margin account, the investor must deposit $2,000 or regulation T whichever is greater. In this case, the investor would have to deposit $2,000. Note - if the investor is purchasing less than $2,000 worth of securities, he/she can pay in full.

Question 37

All of the following are exempt from SEC registration EXCEPT: A. Fixed annuities B. Variable annuities C. Commercial paper D. US Government securities

Answer 37

CORRECT ANSWER IS: B (Variable Annuities) Variable annuities (your favorite ) are not exempt from SEC registration. Since variable annuities do not offer guaranteed payments to an individual, variable annuities must be registered with the SEC.

Question 38

If an investor wants to write a call option, all of the following positions would cover this investor EXCEPT: A. Owning put options on the same stock with a higher strike price B. Owning call options on the same stock with a lower strike price C. Having an escrow receipt for the same stock D. Owning the underlying stock

Answer 38

CORRECT ANSWER IS: A (Owning put options on the same stock with a higher strike price) All of the other choices would be considered covered except for owning a put. If you are selling a call option; if exercised you will have to deliver stock to the holder. Owning a put option gives you the right to sell stock to the person you are exercising at a specific price, it does not give you ownership of the stock and would not cover a call option; selling (writing a put), if you’re exercised against (assigned the contract) obligates you to purchase the stock.

Question 39

In relation to an UGMA account, which of the following is (are) true? I. The minor is responsible for taxes II. The custodian is responsible for taxes III. There may be more than one custodian per account IV. Buying stock on margin is allowed A. I only B. I, III, and IV C. II and IV D. II, III, and IV

Answer 39

CORRECT ANSWER IS: A (I Only) In an UGMA account, the minor is responsible for the taxes. -There can be only one minor and one custodian per account. -Margin is not allowed in UGMA accounts; the “riskiest” position is a rights offering!

Question 40

.All of the following enforce MSRB rules EXCEPT: A. the FED B. the Comptroller of Currency C. the NYSE D. the FINRA

Answer 40

CORRECT ANSWER IS: C (The NYSE) Great correction at review!!! The NYSE does not enforce MSRB rules since municipal bonds always trade OTC. NYSE is an exchange!

Question 41

Under Rule 144, how long must an investor hold on to restricted stock before resale to the public? A. 90 days B. 6 months C. 1 year D. 2 years

Answer 41

CORRECT ANSWER IS: B (6 Months) Great correction at review!!! Put it in brainscape if you feel you need to. An investor must hold on to restricted stock a minimum of 6 months before selling the private stock to the general public.

Question 42

Which of the following would bring the best after tax yield for an investor in the 32% tax bracket? A. A 6% municipal bond B. A 7% preferred stock C. A 7-1/4% corporate bond D. A 7-1/4% US government bond

Answer 42

CORRECT ANSWER IS: A (A 6% Municipal Bond) Put in brainscape! Use the formula for the Taxable Equivalent Yield (TEY): TEY = Municipal yield / (100% - investor's tax bracket) TEY = 6% / 68% = 8.8% Since the municipal bond is federally tax free, it gives an equivalent yield for this investor of 8.8%, which is higher than the next nearest of 7-1/4%.

Question 43

Which of the following are considered violations? I. Commingling II. Interpostioning III. Freeriding and withholding IV. Backing away A. III and IV B. I and II C. II, III, and IV D. I, II, III, and IV

Answer 43

CORRECT ANSWER IS: D (I,II,III, and IV) All of the choices listed are violations. Commingling - mixing fully paid and margined securities. Interpostioning - bringing in a third firm to execute a trade (it is a violation unless it works out cheaper for the customer). Freeriding and Withholding - the failure of a dealer to offer all of the new securities up for sale. Backing away - A failure to honor a firm quote.

Question 44

Which of the following municipal bonds must be quoted yield-to-maturity? I. 6% IDR yielding 4 1/2% II. 8% double barreled yielding 7% III. 5-1/2% GO yielding 7% IV. 6% revenue yielding 8% A. I and II B. II and III C. III and IV D. I and III

Answer 44

CORRECT ANSWER IS: C (III and IV) Great correction at review!!! Municipal bonds must be quoted yield-to-maturity (YTM) or Yield-to-call (YTC), whichever is lower. Discount bonds are quoted YTM and premium bonds are quoted YTC. If the coupon rate is lower than the yield (answers III and IV), it is a discount bond.

Question 45

Which of the following types of issues are most affected by interest rate changes? A. Blue chip B. Cyclical C. Defensive D. Utilities

Answer 45

CORRECT ANSWER IS: D (Utilities) Utilities are most affected by interest rate changes because they are highly leveraged (issue a lot of bonds).

Question 46

If a corporation has 20,000,000 authorized shares, 12,000,000 issued shares, 8,000,000 unissued shares, and 2,000,000 shares of treasury stock, how many shares are outstanding? A. 8,000,000 B. 10,000,000 C. 12,000,000 D. 14,000,000

Answer 46

CORRECT ANSWER IS: B (10,000,000) Put in brainscape! Think about making written flash cards JUST for formulas. Outstanding = Issued - Treasury Outstanding = 12,000,000 - 2,000,000 = 10,000,000

Question 47

Which of the following is a description of the third market? A. Trading between institutions without using a broker-dealer B. Trading of outstanding securities C. Underwriting of new issues D. Listed securities trading OTC

Answer 47

CORRECT ANSWER IS: D (Listed Securities Trading OTC) A third market trade takes place when exchange listed securities trade over the counter (OTC).

Question 48

Which of the following would help increase a GO Bond's credit rating? A. A rate covenant B. An increase in per capita debt C. An increase in assessed property value D. Having a favorable engineers report

Answer 48

CORRECT ANSWER IS: C (An Increase in Assessed Property Value) Great correction at review!!! Ad Valorem taxes are the largest source of funding for G.O. bonds. Ad Valorem taxes are based on **assessed** property values. An increase in assessed property values would improve the credit rating of the government. If property values increase, the local government would collect more Ad Valorem taxes.

Question 49

Which of the following is the largest of all stock indexes? A. Dow Jones Composite B. Dow Jones Industrial Average C. Wilshire D. Standard and Poors 500

Answer 49

CORRECT ANSWER IS: C (Wilshire) Great correction at review!!! The Wilshire includes approximately 6,000 listed common stocks and includes more stocks than any other index.

Question 50

An investor enters a buy stop limit order for ABC at 30.13. The ticker following entry of the order is as follows: 29, 29.63, 29.88, 30, 29.88, 30.25, 30.38, 31, 30.88, 30.38, 30, 30.13, 30.25, 30.38 The order is triggered at: A. 30, executed at 30.25 B. 30.25, executed at 30 C. 30.25, not executed D. 30.38, executed at 31

Answer 50

CORRECT ANSWER IS: B (30.25, executed at 30) First, this order is a buy stop order (SLOBS) which is triggered **at or above** 30.13. The first number on the ticker at or above 30.13 is 30.25. This triggers the order to become a buy limit order (BLISS). The order is executed at or below 30.13. The next number at or below 30.13 after the order is triggered is 30

Question 51

Which of the following exempt securities deals with an offering of $50,000,000 worth of securities or less in a 12-month period? A. Regulation A B. Rule 147 offering C. Regulation D D. Private placement

Answer 51

CORRECT ANSWER IS: A (Regulation A) The correct answer is Regulation A (offering of $50,000,000 or less). Rule 147 offering is the intrastate offering (sales of securities within the corporation’s home state only). Regulation D is a private placement which allows up to 35 unaccredited investors to participate in the offering.

Question 52

A preliminary prospectus would include all of the following EXCEPT: A. An explanation of the uses of the funds being raised B. The public offering price C. The names of the officers of the company D. An SEC disclaimer

Answer 52

CORRECT ANSWER IS: B (The Public Offering Price) The preliminary prospectus (red herring) would include what the funds from the offering would be used for, the names of the officers, and an SEC disclaimer stating that the SEC does not approve issues. The public offering price would not be disclosed on the preliminary prospectus since the price has not been established yet.

Question 53

Corporate bonds settle in: A. 1 business day and payment is due in 4 business days B. 2 business days and payment is due in 2 business days C. 2 business days and payment is due in 4 business days D. 5 business days and payment is due in 7 business days

Answer 53

CORRECT ANSWER IS: C (2 business days and payment is due in 4 business days) Corporate and municipal bonds settle in 1 business days and payment is due in 3 business days.

Question 54

If an investor buys an RST Aug 40 put for 9 and RST is at 37, what is the time value? A. 6 B. 9 C. 12 D. Cannot be determined

Answer 54

CORRECT ANSWER IS: A (6) Option premiums are made up of intrinsic value (how much the option is in-the-money) and time value. The longer the time until expiration of the option, the moretime value. The formula for figuring out the time value of an option (for your S7 well back into estimating premiums with various maturities!): P (premium) = I (intrinsic value) + T (time value) The premium for this option is 9. This is a put option; it’s in the money when the stock price is below the strike price. The intrinsic value would be 3 (3 points in the money). This means that the time value would have to be 6 (use algebra to solve for “T”). P = I + T 9 = 3 + 6

Question 55

Use the following information to answer this question: Public offering price - $21.00 Takedown - $1.50 Concession - $1.00 Re-allowance - $0.75 Managers fee - $0.50 What is the spread? A. $1.00 B. $1.25 C. $1.50 D. $2.00

Answer 55

CORRECT ANSWER IS: D ($2.00) The spread is determined by adding the takedown (the amount the syndicate members make per share) and the manager's fee. Both of these fees are built into the public offering price. $1.50 + $0.50 = $2.00

Question 56

Securities were purchased and accepted. Two days later the securities were returned to the seller because the buyer noticed that they were the wrong securities. This is known as: A. An unauthorized return B. Rejection C. Reclamation D. Commingling

Answer 56

CORRECT ANSWER IS: C (Reclamation) Great correction at review!!! Returning securities that had previously been accepted is called reclamation. Note, securities cannot be returned because of a change in the market price, there had to be some sort of mistake.

Question 57

A bond is convertible into 25 shares of common stock. If the bond trades at 90, what is the parity price of the stock? A. $36 B. $40 C. $80 D. $90

Answer 57

CORRECT ANSWER IS: A ($36) The conversion ratio of 25 shares is given in the question. If the bond is at parity with the stock, the bond and stock are equal in value. If the bond trades at 90 ($900), the stock must also be worth $900. Divide the $900 of stock by 25 shares as displayed below to determine parity. Parity price of the stock = bond price / conversion ratio = $900 / 25 = $36

Question 58

A 7% bond has a basis of 6% and a yield of 5-1/2% if called in 6 years. If the bond trades at 105, how much interest should the investor receive the next time he gets paid? A. $27.50 B. $30.00 C. $35.00 D. $70.00

Answer 58

CORRECT ANSWER IS: C ($35.00) Take a look: You only need the coupon rate of 7%; it remains fixed for the life of the bond. A 7% bond pays $70.00 per year interest (7% x $1,000 par) and breaks it up into two semi-annual payments of $35.00.

Question 59

An unqualified legal opinion for a municipal bond indicates that: A. the issuer meets all conditions without restrictions B. the issuer meets conditions with restrictions C. the bond attorney guarantees all interest payments will be made D. a bond attorney did not examine the indenture

Answer 59

CORRECT ANSWER IS: A (The issuer meets all conditions without restrictions) It’s backwards, I know! An unqualified legal opinion given by a bond attorney states that the issuer does not have any liens or lawsuits pending to affect the quality of the issue.

Question 60

All of the following are leading indicators EXCEPT: A. Money supply B. Stock prices C. Discount rate D. Industrial production

Answer 60

CORRECT ANSWER IS: D (Industrial Production) Go back to the email I sent you with the top leading, coincident and lagging indicators list if you need to. Leading indicators are signals which are used to help predict the direction of the economy. Industrial production is a coincidental indicator, which does not help analysts come to any conclusions.

Question 61

All of the following are important in analyzing a GO bond EXCEPT: A. assessed property values B. feasibility studies C. population D. taxes

Answer 61

CORRECT ANSWER IS: B (Feasibility Studies) Feasibility studies are used for revenue bonds

Question 62

All of the following are steps a registered rep should take when an investor dies, EXCEPT: A. Cancel all open orders B. Freeze the account C. Transfer the money in the account to the executor of the estate D. Cancel all written powers of attorney

Answer 62

CORRECT ANSWER IS: C (Transfer the money in the account to the executor of the estate) Great correction at review!!! The executor is the person that controls the assets of a deceased person. However, the executor may not have physical possession of the assets of the deceased. The assets are maintained in an estate account until the beneficiaries are determined.

Question 63

Which of the following is true of REITs? A. At least 70% of its assets must be invested in real estate related projects B. They may not invest in securities C. They must distribute at least 90% of their net income to investors each year D. They are redeemable

Answer 63

CORRECT ANSWER IS: C (They must distribute at least 90% of their net income to investors each year) REIT's (Real Estate Investment Trusts) must have at least 75% of their assets invested in real estate related projects, not 70%. REIT's may invest in securities (hybrid) and are not redeemable (must be sold to another investor).

Question 64

The maximum sales charge that a mutual fund may charge is: A. 7% B. 7-1/2% C. 8% D. 8-1/2%

Answer 64

CORRECT ANSWER IS: D (8-1/2%) The maximum sales charge for a mutual fund is 8-1/2% of the amount invested.

Question 65

Which of the following must a general partner sign to accept a limited partner? A. Agreement of limited partnership B. Subscription agreement C. Certificate of limited partnership D. Prospectus

Answer 65

CORRECT ANSWER IS: B (Subscription Agreement) Great correction at review!!! The Subscription Agreement must be reviewed and signed by the general partner to accept a new limited partner.

Question 66

If the rate of inflation is positive, but is lower than the previous year, this would indicate: A. deflation B. disinflation C. stagflation D. stagnation

Answer 66

CORRECT ANSWER IS: B (Disinflation) Add to brainscape! If the inflation rate indicates that prices of consumer goods are increasing, but at a slower rate than usual, this would indicate disinflation. Deflation means prices of consumer goods are decreasing and the inflation rate is negative. Stagflation represents high inflation in a slow economy. Stagnation represents a slow economy without high inflation.

Question 67

All of the following are characteristics of American Depositary Receipts EXCEPT: A. Investors do not receive the actual certificates B. Investors of ADRs cannot vote C. Dividends are paid in US dollars D. They help US companies gain access to foreign dollars

Answer 67

CORRECT ANSWER IS: D (They help US companies gain access to foregin dollars) Great correction at review!!! ADRs are receipts for foreign securities trading in US markets; so ADRs help foreign companies gain access to U. S. dollars.

Question 68

A head and shoulders top pattern indicates a: A. Reversal of a bullish trend B. Reversal of a bearish trend C. A steady increase in the price of the stock D. A good time to buy the stock

Answer 68

CORRECT ANSWER IS: A (Reversal of a bullish trend) A head and shoulders pattern is a reversal of a bullish trend.

Question 69

Which of the following are not money market instruments? A. T-bills B. Commercial paper C. Banker's acceptances D. T-strips

Answer 69

CORRECT ANSWER IS: D (T-strips) Great correction at review!!! Money market instruments are short-term debt (1 year or less). T-strips mature in 10-30 years.

Question 70

In a fixed annuity, who assumes the investment risk? A. The annuity company B. The investor C. The broker-dealer D. There is no investment risk

Answer 70

CORRECT ANSWER IS: A (The annuity company) WOOT! In a fixed annuity, the issuer is guaranteeing a fixed return and therefore, they assume the investment risk.

Question 71

Which of the following types of options would be used to hedge a portfolio of automotive stocks? A. Buying a broad-based index option B. Buying a narrow-based index option C. Selling a broad-based index option D. Selling a narrow-based index option

Answer 71

CORRECT ANSWER IS: B (Buying a narrow-based index option) Your second choice! When using options to protect a stock portfolio, buying an option provides more protection than selling an option. Since the investor’s portfolio includes automotive stocks only, the investor should purchase narrow based index options.

Question 72

If a customer is not satisfied with the results of an arbitration, the customer may appeal the decision to: A. The NAC B. The Supreme Court C. The SEC D. No one

Answer 72

CORRECT ANSWER IS: D (No one) Arbitration decisions are binding and non-appealable.

Question 73

If the Fed lowers the discount rate, which of the following is true? A. Long-term bonds decrease in price more than short-term B. Short-term bonds decrease in price more than long-term C. Long-term bonds increase in price more than short-term D. Short-term bonds increase in price more than long-term

Answer 73

CORRECT ANSWER IS: C (Long-term bonds increase in price more than long-term) Your second choice! There is an inverse relationship between outstanding bond prices and interestrates (if one increases the other decreases). If the Fed lowers the discount rate, all interest rates would eventually be lowered. If interest rates are lowered, bond prices would increase, and long-term bond prices would increase more than shortterm.

Question 74

Which of the following bonds is backed by the assets of another corporation? A. Collateral trust B. Equipment trust C. Guaranteed bonds D. Mortgage bonds

Answer 74

CORRECT ANSWER IS: C (Guaranteed Bonds) A guaranteed bond is backed by the issuing company and the assets of another company (usually a parent company).

Question 75

. A syndicate is selling $5,000,000 of a new issue on an Eastern account basis. One of the members of the syndicate has agreed to sell $1,000,000 of the new issue. This syndicate member sells its entire allotment. However, $1,500,000 still remains unsold by other members. How much of the remaining $1,500,000 is this syndicate member responsible for selling? A. None B. $150,000 C. $300,000 D. $1,000,000

Answer 75

CORRECT ANSWER IS: C ($300,000) Great correction at review!!! This particular syndicate member was initially responsible of 20% of the issue. $1,000,000 / $5,000,000 = 20% Since this offering was done on an Eastern (undivided) account basis, this syndicate member is responsible for 20% of the remaining amount. $1,500,000 x 20% = $300,000