Exam Flashcards
A mutual fund with a POP of $22 and an NVA of $20.13 would have a sales charge of?
8.5% (22 - 20.13 = $1.87 / 22= 8.5%)
Between whom are selling concessions allowed?
Between member firms
What is the general contraction in economic activity referred to as?
Recession (a general contraction)
The fund manager of ABC Mutual Fund reported unrealized appreciation of 12% and a 3% increase in net income. The net result is:
An increased value in the portfolio
Which of the following is NOT a characteristic of the secondary market?
Primarily regulated by the Security Act of 1933
Which term refers to an existing public corporation issuing a large block of new shares to expand or modernize?
A. Refinancing or refunding
B. secondary distribution
C. primary distribution
D. initial public offering
C. Primary distribution
In and open-end investment company, the net investment income represents:
A. Net income from dividends and interest paid on securities in the fund portfolio
B. Dividends, interest, and long-term gains on sales of securities
C. Profits from investment company operations
D. Net long-term gains on sales of portfolio securities
A. Net Income from dividends and interest paid on securities in the fund portfolio
Which statement is false regarding the taxation of an annuity if the annuitant should die during distribution?
A. If a lump sum goes to a beneficiary, only the amount in excess of the policy owner’s investment is included in the beneficiary’s gross income for federal tax purposes
B. If the annuitant chose the life income option, nothing is included in the gross state
C. Interest earned during the accumulation period is not taxable
D. If annuity payment are to continue to another person upon an annuitant’s death, the survivor’s proceeds are included in the gross state
C. Interest earned during the accumulation period is not taxable.
Which of the following best describes interpositioning?
A. when a broker-dealer places a third party in between the firm and the customer when completing a trade for the customer in the secondary market
B. when a broker-dealer purchases a security in the secondary market for two different customers at two different times
C. when a broker-dealer trades a security back and forth in order to show price movement on the ticker tape in the secondary market
D. when a broker-dealer purchases a security before he customer’s trade in the secondary market
A. When a broker-dealer places a third party between the firm and the customer when completing a trade for the customer in the secondary market
Technically, the period of time over which distributions of accumulated balances are made to the annuitant, is referred to as the:
A. Accumulation period
B. Liquidation period
C. Benefit period
D. Annuitization period
D. Annuitization period
An Annuitization period usually involves a systematic, even series of distributions made to an individual over his or her life, or a specific period. Annuitization is the payout phase of the annuity product, while the period during which deposits are made is the accumulation.
Who can initiate arbitration proceeding against a registered representative?
I. A customer
II. An employer
III. An underwriter
A. I and III
B. I, II, and III
C. II and III
D. I
B. I, II, and III
When a registration statement has been reviewed by the SEC and the security has been declared effective, a securities salesman may legally say:
A. That the SEC has passed on the accuracy of the prospectus
B. That the prospectus has been approved by the SEC
C. That the SEC has released the securities for sale
D. That the SEC has passed on the adequacy of the prospectus
C. That the SEC has released the securities for sale
The type of account ownership where a person owns a portion of a portfolio, and allows his estate to pass the securities to heirs, is known as:
A. JTWROS
B. Individual registration
C. Trust account
D. Tenancy in common
D. Tenancy in Common
What is the characteristic of a general obligation municipal bond?
A. Does not carry an attached legal opinion
B. Carries no exemption from federal or state income taxes
C. Is payable solely from the revenues of the facility against which the bonds are issued
D. Is backed by the full faith and credit of the issuing jurisdiction
D. Is backed by the full faith and credit of the issuing jurisdiction
Darcy has signed up for a mutual fund investment program in which she invests $100 per month. Over the previous six months, the prices of the fund at the times of purchase were $4.00, $4.50, $5.00, $5.50, $6.75, $7.25. Which of the following statements is correct?
A. The average cost per share is lower than the average price per share
B. The average cost per share is unrelated to the average price per share
C. The average cost per share is equal to the average price per share
D. The average cost per share is greater than the average price per share
A. The average cost per share is lower than the average price per share
DND Funds would like to use investment company rankings in a new mutual fund ad campaign. Which of the following are required disclosures when using rankings?
I. The fact that past performance is no guarantee of future results
II. The publisher of the ranking data
III. A full description of each fund’s expense ratio
IV. An explanation of the fund’s five-star ranking system
A. III and IV
B. I, II, and IV
C. I, II, and III
D. I and II
B. I, II, and IV
Which of the following statements best characterizes the current yield?
A. It is measure of the return that only has significance if the bond is sold prior maturity
B. It is the coupon rate
C. It is a measure of return that takes into account the bond’s coupon, the price paid for the bond, and the gain or loss realized on the bond when it matures
D. It is a measure of return that takes into account the bond’s coupon and the price paid for the bond
D. It is a measure of return that takes into account the bond’s coupon and the price paid for the bond
A company has issued $1.6 million in collateral trust certificates, $1.4 million in equipment trust certificates, and $1.9 million in mortgage bonds. In addition, the company has 100,000 shares of company stocks outstanding at current value of $10 per share. This indicates the issuer has:
A. High interest costs and is highly leveraged
B. High interest costs and moderate leveraged
C. High interest costs and primarily equity financing
D. Low interest costs and primarily equity financing
A. High interest costs and is highly leverage
Two sisters acquired 1,200 shares as a joint tenant with rights of survivorship. Each sister’s ownership is:
A. unequal/divided
B. Equal/undivided
C. Unequal/undivided
D. Equal/divided
B. Equal/undivided
A mutual fund has lost money continually over the past year. The board of directors wants to change the fund’s investment objectives. This can only be done if:
A. A majority of the outstanding common stock shares approve
B. The shareholders have an opportunity to change to another fund without a sales charge
C. The fund gives the shareholders 60 days’ notice
D. More than 50% of the shareholders vote to change the investment objectives
A. A majority of the outstanding common stock shares approve
Which risk is most associated with long-term AAA rated bonds?
A. Legislative
B. Default
C. Marketability
D. Purchasing power
D. Purchasing power
AAA bonds are considered most secure in terms of default risk, and they are very liquid (marketable). However, long-term fixed income investment lose value with inflation, and inflation usually occurs gradually over long time periods. This is due to the fact that the interest rate the bond will pay the investor does not change over time. foreign funds and sector funds are subject to greater than average legislative risk.
Four years ago, the ABC fund purchased 10,000 shares of XYZ associates common stocks at $45 per share. After a series of accounting scandals, the stock is trading at $2.10. ABC fund’s portfolio manager has decided to liquidate the losing position. What effect will this activity have on the ABC fund’s NAV?
A. The NAV will only fall if ABC has not claimed a tax loss on this position in a prior year
B. NAV will remain unchanged
C. The NAV will fall
D. The NAV will rise
B. The NAV will remain unchanged
Liquidations of portfolio holdings have no impact on NAV, since the position is marked to market on a daily basis and therefore the current price is already a part of the NAV will rise when the value of its underlying positions increase and decrease as portfolio positions fall in value. Customer deposits and withdrawals also do not affect the NAV.
Which statement is correct regarding a bank or trust company serving as custodian or trustee of a mutual fund?
A. Takes part in the sale or distribution of funds shares
B. Safeguards securities for the fund
C. Performs management and investment functions
D. Provides protection against the possible decline in the market value of the fund shares.
B. Safeguard securities for the fund
Which one is NOT a requirement of the Bank Secrecy Act?
A. Establish and maintain policies to comply with the Bank Secrecy Act
B. A SAR must be filed by the broker-dealer to the Financial Crimes Enforcement Network
C. Each member firm must establish and maintain procedures that will detect money laundering
D. Review these procedures quarterly
D. Review these procedures quarterly
An investor has experienced substantial losses in the stock market and is looking to place residual assets in a conservative investment. It is recommended by a RR to invest the remaining capital in Treasury Receipts. Which of the following statements are correct concerning these instruments?
I. These securities are a direct obligation to the U.S. Government
II. These securities are NOT a direct obligation to the U.S. Government
III. These securities pay interest semiannually
IV. These securities are noninterest bearing
A. I and IV
B. I and III
C. II and III
D. II and IV
D. II and IV
Broker-dealers create treasury receipts by depositing Treasury securities with a trustee and selling securities that are backed by this collateral. These receipts are not direct obligations of the U.S. Government. Conversely, Treasury STRIPS, which are directly issued by the U.S. Treasury Department, are considered to be direct obligations of the federal government. Both are zero-coupon securities.
Which of the following regulates variable annuities?
I. Security Act of 1933
II. Insurance Company Act of 1940
III. Securities Exchange Act if 1934
IV. Investment Company Act of 1940
A. I, III, IV
B. I and II
C. II and III
D. I, II, III, and IV
A. I, III, and IV
A broker-dealer who buys and sells for its own account is acting as a (an):
A. Principal
B. Agent
C. Syndicate
D. Underwriter
A. Principal
Which statement is correct regarding FINRA’s Code of Arbitration?
I. A customer can force a firm into arbitration
II. A firm can force a customer into arbitration
III. A customer can appeal the decision by the arbitrators
IV. A firm can force another firm into arbitration
A. II and III
B. I and III
C. II and IV
D. I and IV
D. I and IV
A customer can force a firm into arbitration but a firm cannot force a customer into arbitration. Firms must settle their disputes in arbitration. Once a dispute goes to arbitration, neither party can appeal the decision.
What is the maximum fine that can be levied by the FINRA Hearing Panel?
A. $2,500
B. There is no maximum
C. $1,000,000
D. Three times the damages suffered by the aggrieved
B. There is no maximum
In which of the following circumstances would a person need to be registered as a registered representative?
A. A firm’s silent partner has invested $1,000,000 in the firm, but is only involved for capital participation
B. An employee if a member firm is a registered floor member of the NYSE
C. An employee of the firm conducts sales training seminars for registered representatives of the firm, but is paid a monthly salary
D. A secretary files copies of a customer confirmation slips and occasionally verifies confirmation information with the customer
C. An employee of the firm conducts sales training seminars for registered representatives of the firm, but is paid a monthly salary.
Which of the following statements to a prospective buyer is permissible?
A. These securities have been verified by the SEC
B. Mutual fund investment can protect you against loss of your principal
C. Variable annuities are certain way of beating the market
D. The value of your mutual fund account may vary at different times with the market
D. The value of your mutual fund account may vary at different times with the market
All of the following are fiscal policy controls over the economy, EXCEPT:
A. Increased government spending
B. Reductions in the discount rate
C. Tax increases
D. Tax cuts
B. Reductions in the discount rate
A firm would be acting as a principal in which of the following transactions?
I. An all-or-none underwriting
II. A standby underwriting
III. A trade in which the firm sells stock from inventory
IV. A trade in which a commission is charged
A. III
B. II and III
C. II
D. II, III, and IV
B. II and III
In a principal transaction, a broker-dealer purchases stock for its own account or sells stocks from its own account. In a standby underwriting, a broker-dealer agrees to buy stock, for its own acct, from an issuer is the issuer fails to sell all of the stocks available to exiting shareholders in a rights offering. This would, therefore, be a principal transactions. Likewise, a broker-dealer selling stock from its inventory is selling stock from its own account (acting as a principal)
What would a holder of an 8% bond paying semiannual interest receive on each payment date?
A. $40
B. $20
C. $160
D. $80
A. $40
An investment advisor is required to be registered as a federal covered adviser if its assets under management are at least:
A. $110,000.000
B. $100,000
C. $10,000,000
D. No dollar limit
A. $110,000,000
A geographically concentrated fund is a mutual fund which has:
A. Above average interest rate risk
B. Its assets allocated evenly throughout a specific geographic region
C. At least 80% of its assets invested in a specified country or region
D. The ability to move strategically between geographic regions
C. At least 80% of its assets invested in a specified country or region
Which two of the following describe the maximum number of accredited and nonaccredited investors that may participate in a private placement under Regulation D?
I. 35 accredited investors
II. Unlimited number if accredited investors
III. 35 nonaccredited investors
IV. Unlimited number of nonaccredited investors
A. I and IV
B. II and III
C. I and III
D. II and IV
B. II and III
Regulation D limits nonaccredited investors to whom securities may be sold to maximum of 35. The private may include an unlimited number of accredited purchases–those who are considered sophisticated or wealthy investors.
When an issuer sells securities in primary offering, who ends up with the net proceeds?
A. The stock holders
B. The broker-dealer
C. The member of the board of directors of the corporation
D. The issuer
D. The issuer
All of the following are characteristic of a bond, EXCEPT:
A. They pay a fixed interest rate
B. The bond matures in 10-30 years
C. Bonds are actively traded in the secondary marketplace
D. The represent an ownership position in the issuer
D. They represent an ownership position in the issuer
Which of the following underwriting agreements allows an underwriter to step in, buy remaining shares, and then sell those shares to the public?
A. All or None
B. Best efforts
C. Secondary commitment
D. Standby
D. Standby
An issuer can begin to sell a new issue of securities once the SEC:
A. Establishes the registration’s effective date
B. Approves of the securities contained in the registration statement
C. Guarantees the securities referred to the in the registration statement
D. Vouches for the accuracy of the information contained in the registration statement
A. Establishes the registration effective date
When it comes to taxes, what is the biggest disadvantage of owning a corporate bond?
A. Dividends are taxable
B. Profit made from trading stock are taxable
C. Double taxation
D. 100% of losses are not deductible against ordinary income.
C. Double taxation
If XYZ Corporation issued 10 million shares of common stock and has 1 million in its treasury, how many shares are considered outstanding?
A. 1 million
B. 9 million
C. 10 million
D. 11 million
B. 9 million
Which of the following is an arbitrary number used for accounting purposes?
A. Tax basis
B. Book value
C. Market value
D. Par value
D. Par value
Which of the following is the most common form of corporate dividend payment?
A. Stock
B. Bond
C. Cash
D. Property
C. Cash
A stock split is used for all of the following reasons, EXCEPT:
A. As a form of “payment” from the corporation to current stock holders
B. To make the stock attractive for secondary market trading
C. To give the current shareholders more money right away
D. To make the price more marketable in the market
C. To give current shareholders more money right away
Which corporate bond has a current yield less than its coupon rate?
A. A bond trading at 100 points
B. Discount
C. Par
D. Premium
D. Premium
Which of the following bond would pay out the highest interest rate to investors?
A. Straight debentures
B. Mortgage bonds
C. Collateral trust certificates
D. Subordinated debentures
D. Subordinated debentures
When securities are sold in the secondary market who winds up with the ned proceeds?
A. Broker-Dealers
B. Issuers
C. Investment bankers
D. Investors
D. Investors
ABC is quoted at 15-16. What is the ask?
A. 1
B. 15
C. 15 1/2
D. 16
D. 16
What is the maximum loss for a corporation’s stockholders?
A. A stockholders liability is unlimited since they are considered an owner
B. The value of their investment in the company
C. Their equity in their home
D. The original amount they invested plus a portion of any future wages received
B. The value of their investment in the company
A bond which is backed by a corporation’s credit and not by its assets is:
A. A collateral trust certificate
B. A debenture
C. An equipment trust certificate
D .A mortgage bond
B. A debenture
An equipment trust certificate is a bond secured by a corporation’s equipment such as railroad cars, airplanes, etc. A collateral trust certificate (bond) is a bond secured by stocks and bonds of other corporations. A debenture is an unsecured loan. It is only backed by the corporation’s credit, not its assets. A mortgage bond is backed by real estate of the issuer.
The Securities Investor Protection Corporation (SIPC) is funded by:
A. FINRA
B. Assessments paid by its member firms
C. Fees paid by retail investors
D. Subsidies from the federal government
B. Assessments paid by its member firms
The Securities Investor Protection Corporation is funded by assessments paid by its member broker-dealers.
Which tax form reports the payment of dividends and interest?
1099
Which type of municipal bond is backed by the full faith and credit of the issuing municipality?
A. Industrial revenue bond
B. General obligation bond
C. Revenue bond
D. Agency bond
B. General obligation bond
G.O. bonds are backed by full taxing power of municipality. Revenue bonds are backed by user fees generated by the facility. Industrial development bonds are repaid through a corporation’s lease payments. Agency bonds are issued by government agencies, such as GNMA.
What is permissible with respect to selling shares of a new issue by a broker-dealer?
A. The broker-dealer sells to a client while retaining a 50% interest
B. The broker-dealer sells to a bank officer
C. A broker-dealer sells to a real estate agent
D. A registered representative sells to his wife
C. A broker-dealer sells to a real estate agent
A real estate agent is a member of the public and can buy new issues. People and firms involved in the sale of new issues, including family members or employees, and certain officers of financial institutions, are prohibited from buying new issues.
Which of the following include loan provisions?
I Coverdell Savings Account
II Variable life policy
III 401(k) Plan
IV Variable annuity
A. I and III
B. II and III
C. I and IV
D. II and IV
B. II and III
Loans may NOT be taken out against variable annuities or Coverdell Savings accounts. Both variable life and 401(k) plans include loan provisions.
The decisions and actions of the Fed that influence the amount of money and credit in the U.S. economy is called:
A. Fiscal Policy
B. Internal Revenue Policy
C. Monetary Policy
D. Treasury Policy
C. Monetary Policy
Monetary policy refers to the decisions and actions of the Fed that influence the amount of money and credit in the U.S. economy.
How often must investment companies send financial reports to shareholders?
A. Semiannually
B. Quarterly
C. Monthly
D. Annually
A. Semiannually
Andrea, age 45, has invested $74,000 into a nonqualified variable annuity. The contract value is currently $220,000. If she withdraws $10,000 to pay for private high school tuition for her son, she will owe:
A. $1,000 in taxes
B. A $1,000 penalty
C. Taxes on $10,000 and a $1,000 penalty
D. Taxes on $10,000
C. Taxes on $10,000 and a $1,000 penalty
The IRS treats this distribution as LIFO, so her withdrawal is considered 100% earnings for tax purposes. She will owe taxes on the full $10,000 and she also will have to pay a penalty of 10% ($1,000 in this case) on the amount withdrawn since she is younger than age 59 1/2.
Shares that a corporation purchases from existing shareholders are referred to as what type of stock?
A. Preferred
B. Common
C. Corporate
D. Treasury
D. Treasury
The SEC in reviewing prospectuses and registration statements:
A. Passes on the merits of the particular security covered by the registration statement
B. Guarantees the accuracy of the disclosures made in a prospectus
C. Does not approve securities registered with it and offered for sale
D. Guarantees the adequacy of the disclosures made in a prospectus
C. Does not approve securities registered with it and offered for sale
What is a unique feature of a Roth IRA compared to a traditional IRA?
A. Tax free distributions may be postponed to begin beyond reaching the age of 70 1/2
B. Earnings grow on a tax deferred basis
C. Penalty free distributions may be taken before reaching the age of 59 1/2
D. Catch up provisions allow people age 50 or older to make contributions in excess of the normal annual maximum
A. Tax free distributions may be postponed to begin beyond reaching the age of 70 1/2
The age 70 1/2 minimum distribution rules ensure that qualified plan covered individuals take some taxable income in retirement. Because Roth IRA distributions normally are tax free, there is no need for such rules.
What is the maximum dollar dispute that can be handled through simplified arbitration?
A. $10,000
B. $5,000
C. $50,000
D. $1,000,000
C. $50,000
Disputes involving $50,000 or less are handled through the simplified arbitration process. In this process, there is one arbitrator who renders a binding decision. Binding means no appeal.
An investor has an option to sell 100 shares of ABC stock at $50 per share. The investor has a:
A. Stock right
B. Call option
C. Stock warrant
D. Put option
D. Put option
A put option gives the buyer the right to sell stock at a stated price, while a call option gives the buyer the right to buy stock at a stated price. Rights are short-term options to buy and warrants are long-term options to buy.
Which of the following amendments to the Securities Exchange Act of 1934 created FINRA?
A. Regulation T
B. The Investment Company Act of 1940
C. The Glass-Steagall Act
D.The Maloney Act
D. The Maloney Act
The Maloney act, an amendment to the Act of 1934, paved the road for the creation of the Financial Industry Regulatory Authority (FINRA). FINRA has jurisdiction over the majority of securities transactions including variable product sales. The Glass-Steagall separated banking from investment banking activities. Regulation T set the amount of collateral that was necessary in order to buy securities on margin as well as when the deadline was to pay for investment purchases. The Investment Company Act of 1940 defined and classified investment companies.
What is a correct definition of a dealer?
A. An entity who matches a buyer and seller
B. An entity who trades for accounts of clients
C. An entity acting on an agency basis
D. An entity who trades for its own account
D. An entity who trades for its own account
A dealer is an entity trading for its own account, acting in a principal capacity, which involves risk. The other three choices describe a broker, and a broker does not take risk. It earns a commission for matching up buyers and sellers.
If a particular fund has a sales load of 7% and a public offering price (POP) of $10, what is the NAV per share?
A. $10.70
B. $7.00
C. $10.00
D. $9.30
D. $9.30
$10 x 7% = $.70. $10 - $.70 = $9.30. NAV + sales charge= POP
Who of the following is NOT entitled to breakpoints on mutual fund shares?
A. A pension plan trust
B. A husband and wife purchasing for their joint account
C. A husband and wife purchasing for their joint account and for each separate account of their three minor children
D. A mother and her 40-year-old daughter
D. A mother and her 40-year-old daughter
Which of the following is NOT a characteristic of a closed-end management company?
A. It may issue common stock, preferred stock, and bonds
B. It may invest in common stock, preferred stock, and bonds
C. Its shares trade in the secondary market
D. It engages in forward pricing
D. It engages in forward pricing
When is the ex-dividend date for a mutual fund?
A. The third business day after the record date
B. The first business day of each month
C. The next business day after the record date
D. Two business days prior to the record date
C. The next business day after the record date
The ex-dividend date is the first day a mutual fund trades without the amount of its pending distribution reflected in the share price. For mutual funds, this is the business day after the record date. The record date is the day used to determine who will receive the distribution. If you are a shareholder as of the close of business on the record date, you will receive the distribution. Notice that this is different than the ex-dividend date for stock, which is two business days before the record date.
A management company’s ask price increased 42 cents, but its NAV per share only increased 12 cents. This indicates:
A. Fewer people were interested in buying shares of the fund
B. The increase in the public’s demand for the shares is greater than the fund’s increase in NAV per share
C. The company is open-end
D. The fund’s NAV increased since more investors bought shares in the management company
B. The increase in the public’s demand for the shares is greater than the fund’s increase in NAV per share
What would be payable to a beneficiary in the event an annuitant dies during the accumulation period?
A. The amount paid into the contract (cost basis) only
B. The face amount
C. The lesser of the annuity balance or the amount paid into the plan
D. The greater of the annuity balance or the amount paid into the plan
D. The greater of the annuity balance or the amount paid into the plan
Should an annuitant die during the accumulation period, the beneficiary is assured of receiving the annuity balance or the cost basis, whichever is greater.
All of the following are responsibilities of a mutual fund’s investment adviser, EXCEPT:
A. Making buy and sell decisions within the portfolio
B. Researching potential and existing investments for the fund
C. Providing shareholders with the tax status of fund distributions
D. Determining the fund’s objectives
D. Determining the fund’s objectives
Fear of a revolution in a foreign country is an example of:
A. Currency exchange risk
B. Political risk
C. Interest rate risk
D. Purchasing power risk
B. Political risk
Which of the following is/are considered a Management Investment Company under the Investment Company Act of 1940?
I Mutual fund
II Variable annuity
III Insurance company
IV Bank broker-dealer
A. I
B. III and IV
C. I and II
D. I and IV
A. I
A U.S. Government bond that is selling at 98.28 would have the value of:
A. $988.75
B. $983.00
C. $982.80
D. $980.28
A. $988.75
Government bonds are quoted in points and in 32nds of points. The period in the quote denotes 32nds of points, so the quote is 98 whole points and 28/32 of a point. One bond point equals $10. $980 + (28/32 x $10) = $980 + $8.75 = $988.75
Which of the following is an example of a private securities transaction?
A. A registered representative buys interests in a limited partnership for their own investment account after notifying the firm and did not receive any compensation
B. A registered representative sells a customer a whole life policy through an outside insurance company
C. A customer wishes to buy a variable annuity from a company with which their registered rep’s BD does not have a selling agreement, the rep contacts the insurance company directly and makes the sale
D. A registered representative sells a customer a very special mutual fund which is sponsored by a well-known fund family that has a selling agreement with the firm
C. A customer wishes to buy a variable annuity from a company with which their registered rep’s BD does not have a selling agreement, the rep contacts the insurance company directly and makes the sale
A private securities transaction occurs when a representative sells securities to customers without going through the rep’s employing BD.
The statute of limitations under FINRA’s Code of Arbitration is:
A. Three years
B. There is no statute of limitations
C. Six years
D. Ten years
C. Six years
A client is saving money to take a cruise, which is eight months away, with her former college roommates. She is looking to invest her vacation savings in hopes to generate double digit returns over the next eight months. Which one of the following investments should be recommended?
A. Aggressive growth fund
B. Junk bonds
C. Call options
D. Money market fund
D. Money market fund
Which statement pertaining to a non-qualified retirement plan is correct?
A. Because it is not qualified, such a plan is not a binding legal agreement
B. The employer may discriminate and the plan itself does not receive IRS approval
C. Employer contributions to the plan are tax deductible by the employer
D. ERISA regulations include less stringent reporting requirements for these plans
B. The employer may discriminate and the plan itself does not receive IRS approval
Which securities are marketable?
I Treasury bills
II Treasury stock
III Agency bonds
IV U.S. savings bonds
A. I and II
B. II and III
C. III and IV
D. I and III
D. I and III
At least 75% of the board of a mutual fund with a front-end load sales charge must be non-interested parties. Who is considered a non-interested party?
A. Legal counsel for the fund
B. An owner of 3% of the investment company’s shares
C. The immediate family of an employee of the fund’s underwriter
D. An employee of the fund’s investment adviser
B. An owner of 3% of the investment company’s shares
The first three would be interested parties. The last person would be non-interested until his share of the voting stock in the investment company (the shares) rose to 5%.
With respect to tenants in common, which response is true?
A. Shares need not be equal. Each tenant holds fractional interest. Upon death, the other tenant has a say in where the proceeds go.
B. Shares need not be equal. Each tenant holds fractional interest.
C. Each tenant holds fractional interest. It cannot be disposed of by will.
D. Shares need not be equal. Each tenant holds fractional interest. Upon death, the other tenant has a say in where the proceeds go. It cannot be disposed of by will.
B. Shares need not be equal. Each tenant holds fractional interest.
Mary and Nancy each invested in diversified management companies. Mary’s fund had a continuous offering of shares and Nancy’s fund did not. Which of the following is true regarding this situation?
A. The price for Mary’s shares is determined by the public’s demand for the fund
B. The selling price for Nancy’s fund is the highest bid price
C. The selling price for Mary’s shares is the highest bid price
D. The price for Nancy’s shares is net asset value plus sales charge
B. The selling price for Nancy’s fund is the highest bid price
Mary’s shares are in an open-end company. Her pricing is based on the NAV plus an applicable sales charge. Nancy’s share price is based on public demand. Mary’s sales price is the next calculated NAV; not the bid price since open-end shares are not auctioned. Closed-End shares are sold at the highest bid price.
Which statement is false regarding trading authorization over a customer account?
A. A customer’s spouse may have written discretion over the account
B. One’s CPA may have limited written authorization over the account
C. No one other than the broker-dealer may have written authorization over the account
D. A broker-dealer may have full written authorization over the account
C. No one other than the broker-dealer may have written authorization over the account
What are the characteristics of accounts owned by more than one person as tenants in common?
I Each owner has an equal undivided ownership interest
II Each owner has a fractional, but not necessarily equal, undivided ownership interest
III If any party dies, the survivor(s) take(s) over the whole account
IV If any party dies, the descendant’s share of the account passes to his or her estate
A. I and III
B. II and IV
C. II and III
D. I and IV
B. II and IV
An example of the negotiated market is:
A. CBX
B. NASDAQ
C. NYSE
D. AMEX
B. NASDAQ
Sam would like to move his new client out of her existing variable annuity and move her into a new contract that earned 15% last year. What is the most likely interpretation of this practice under FINRA rules?
A. Exchanging annuities never makes sense for clients below 59 1/2 since taxes will come due at time of the replacement
B. This action is acceptable only if the transaction is suitable for the client
C. This practice is always unacceptable under anti-churning rules
D. This practice requires the written approval of the client’s tax advisor
B. This action is acceptable only if the transaction is suitable for the client
Exchanging a client from one annuity account into another is a permissible event, however there must be valid reasons for an RR to recommend a change. Valid reasons may include better performance and/or lower costs associated with a new contract. A Section 1035 Exchange is often utilized to move funds from one VA to another without incurring a current tax liability.
All of the following are characteristics of U.S. Government securities, except:
A. Exempt from interest rate risk
B. Interest is subject to federal taxation
C. Virtually default risk free
D. Interest is exempt from state and local taxation
A. Exempt from interest rate risk
A trade confirmation must be provided to the customer:
A. On or before the settlement date
B. Two business days after the settlement date
C. One business day before the trade date
D. On the trade date
A. On or before the settlement date
Luke is considering purchasing life insurance. He would like a permanent policy and would like the most flexibility possible in terms of premium payments and investment choices. The best choice for Luke would be:
A. Universal life
B. Variable universal life
C. Variable life
D. Whole life
B. Variable universal life
All the mentioned policies are permanent insurance. Whole life has fixed premiums and any cash value is invested in the insurance company’s general account. Universal life has flexible premium options but the cash value must also go to the general account. Variable life offers investment choices, but again has fixed premiums. Variable Universal Life (VUL) would provide the greatest flexibility in terms of both premium payments and investment choices. Many VUL policies even have a conversion privilege which would allow the policy holder to convert to a traditional whole life policy if they felt it was better for them.
A broker-dealer is underwriting a new issue and is acting in the capacity of an agent. The type of underwriting involved could be all of the following, EXCEPT:
A. Firm commitment
B. All-or-none
C. Best efforts
D. Mini-max
A. Firm commitment
In a firm commitment offering the underwriter acts as a principal; they purchase all of the shares from the issuer and attempt resell them at their own risk. Underwriters act as agents or brokers in best efforts underwritings and their variations, including all-or-none and mini-max offerings. They are paid a commission for any shares sold but have no capital risk for any unsold shares.
Which of the following situations is considered a 1035 exchange?
A. A customer wants to exchange a whole life insurance policy for a variable life insurance policy of a different insurer
B. A customer wants to exchange an annuity policy for a life insurance policy
C. A customer wants to exchange a whole life policy for a variable annuity and have the benefits payable to a different person
D. A customer wants to exchange shares in a growth mutual fund for shares in an income mutual fund and both funds have different investment advisors
A. A customer wants to exchange a whole life insurance policy for a variable life insurance policy of a different insurer
A treasury bill does NOT have which of the following characteristics?
A. It is a marketable issue that trades in the secondary market
B. It is sold at face value and pays interest quarterly
C. It is sold weekly on a competitive bidding basis
D. It has a maturity date of up to 1 year
B. It is sold at face value and pays interest quarterly
Last year, a client purchased an 8% G.O. bond at par. The current yield on the bond stands at 9.5%. Which two of the following statements are correct?
I The market value of the bond has risen since the purchase
II The market value of the bond has fallen since the purchase
III The investor will receive $95 per year in interest over the coming year
IV The investor will receive $80 per year in interest over the coming year
A. I and IV
B. I and III
C. II and IV
D. II and III
C. II and IV
An investor who owns an 8% bond will receive $80 per year in interest (8% x $1,000 par), regardless of the current market price of the bond. However, the current price of the bond will affect the bond’s current yield, which is the bond’s coupon payment divided by its current market value. Since this bond pays an $80 annual coupon, the only way for it to show a current yield of more than 8% is to have a price of less than $1,000 par. Since most bonds are originally issued at par, this means the bond’s price must have fallen since it was issued.
A Series 6 licensed representative may sell all of the following securities, EXCEPT:
A. Unit investment trusts
B. Open-end funds
C. Common stock
D. Variable annuities
C. Common stock
Which of the following describes the reason dealers are unable to sell open-end funds on margin?
A. Mutual fund share purchases are always new issues and are ineligible for margin according to the Exchange Act
B. Mutual funds are not defined as a security under Reg. T
C. Mutual funds are volatile, and therefore are subject to higher initial requirements than the Reg. T provision
D. Open-End funds do not trade on an exchange, making them ineligible for margin under Reg. T
A. Mutual fund share purchases are always new issues and are ineligible for margin according to the Exchange Act
Open-end funds are in continuous issuance, which is a fancy way of saying they’re always in IPO mode. The Exchange Act forbids underwriters, including mutual fund dealers, from selling new issues on margin until 30 days have elapsed from the end of the offering. Since mutual fund offerings never end, they are always subject to this restriction.
What effect will an outstanding loan have on the death benefit of a variable life policy?
A. Outstanding loans will not affect the amount of death benefit paid to the named beneficiary unless they exceed the current cash value of the contract
B. Outstanding loans will decrease the amount of death benefit paid to the named beneficiary
C. Outstanding loans will increase the amount of death benefit paid to the named beneficiary
D. Outstanding loans will decrease the amount of death benefit paid to the named beneficiary unless the contract owner has purchased a Loan Indebtedness Forgiveness Rider (LIFR) at the time of the contract’s inception
B. Outstanding loans will decrease the amount of death benefit paid to the named beneficiary
Under the Investment Company Act of 1940, which of the following would NOT be considered a management company?
A. Unit Investment Trust
B. Nondiversified management company
C. Open-end
D. Closed-end
A. Unit Investment Trust
A client who has annuitized a contract is entitled to an initial payment of $3000 based on an AIR of 5%. In the first month after Annuitization, the separate account earned 4%, resulting in a reduced second payment of $2700. The next month, the separate account earns 0%. What will be the dollar amount of the third payment?
A. Less than $2700
B. More than $2700
C. $2700
D. $0, since the account had no earnings
A. Less than $2700
Generally speaking, it is not advisable for an investor to participate in short-term trading in mutual funds with a sales load because of the:
A. Loss of Regulation T advantages
B. Regulation M penalties
C. Impact of recurring sales charges that reduce the potential for profit
D. Low potential for marketability of such funds
C. Impact of recurring sales charges that reduce the potential for profit
A brokerage firm has been informed by FINRA that it must create and implement an anti-money laundering program that conforms to the PATRIOT Act and industry interpretations. Which of the following is required of the firm?
A. Require all associated persons to complete the FINRA sponsored anti-money laundering training program
B. Create internal policies that will prohibit any deposits of more than $10,000
C. Notify FINRA when all employees have completed the required training
D. Establish an independent audit testing for compliance to be conducted by member personnel or a qualified outside party
D. Establish an independent audit testing for compliance to be conducted by member personnel or a qualified outside party
The ABC Fund currently invests in micro-cap offerings in the bio-technology arena. The fund would like to alter its primary investment objective and begin investing in more well-established small to mid-cap holdings. What must occur prior to the fund changing its objective?
I A majority of the fund’s shareholders must approve of the change
II A majority of the fund’s outstanding shares must approve of the change
III The SEC must be given 180 days notice and a new prospectus must be distributed to all shareholders
IV Written authorization must be granted by the fund’s investment advisor
A. II
B. I and III
C. III
D. II, III, and IV
A. II
II A majority of the fund’s outstanding shares must approve of the change
An investor with a very long-term investment time horizon should invest in:
A. Money market fund
B. Growth Fund
C. High yield bond fund
D. Balanced fund
B. Growth Fund
Pete is a conservative investor who likes to buy fixed-income products. His RR is recommending that Pete liquidate his Matrix Government Fund Class B shares and move the money to the Holloway Government Fund Class B shares. The original fund has been held for 5 years and no CDSC applies. Which of the following statements regarding this recommendation is correct?
A. The activity is permissible since Pete will not be assessed a CDSC
B. The RR may be trying to churn the account
C. The client must sign a swap acknowledgement form (SA-4B) prior to the trades
D. The activity is permissible since Pete will not have to pay a new sales charge
B. The RR may be trying to churn the account
If an RR suggests that a client move his assets from one class B fund into another class B fund in a different family; the motive must be questioned, especially since the investment holdings are similar. The client must now effectively start over with the new fund and may be forced to hold the new investment for several years or incur a CDSC. The RR meanwhile has been paid up-front by the new fund family. Form SA-4B are fictitious.
Who sets and manages fiscal policy?
A. The Fed
B. The President and Congress
C. The Internal Revenue Services (RS)
C. The U.S. Treasury
B. The President and Congress
In redeeming shares of an open-end investment company, which of the following is NOT necessary?
A. Shares must be in lots of 100
B. Signatures must be guaranteed as required by prospectus
C. The value of the redemption will be determined by the forward pricing rule
D. Redemption proceeds must be paid 7 calendar days
A. Shares must be in lots of 100
How often are long-term capital gains distributions typically paid out by a mutual fund?
A. Annually
B. Quarterly
C. Monthly
D. Semiannually
A. Annually
An open-ended investment company that invests primarily in the securities of companies in a specific geographic area is called:
A. Sector fund
B. Regional fund
C. Global fund
D. Sectional fund
B. Regional fund
“Good delivery” refers to:
A. The delivery of stock certificates or other securities in good physical condition in the correct denomination with the right signatures
B. Receiving stock dividends on the payable date
C. Completing an investing account’s holdings transfer in a timely manner from one broker-dealer to another
D. Purchasing stock by exercising a call
A. The delivery of stock certificates or other securities in good physical condition in the correct denomination with the right signatures
Oops! The correct answer was A.
The customer must sign/endorse the certificate exactly the same way as it appears on the face of the certificate. The certificate must be in the proper denomination and in good physical condition. It would be good delivery if a mutilated certificate is properly authenticated. The other three choices are distractors. Receiving stock dividends on the payable date is an unlikely event since it is when the transfer agent is to pay them which is not necessarily the date the investor will receive them. Completing an investing account’s holdings transfer in a timely manner from one broker-dealer to another is conducted through the ACATS system. Purchasing stock by exercising a call option results in a regular investment transaction except for the quantity and dollar amount per share are predetermined in the option contract.
A common stock is selling at $14.90 per share. The issuer’s new product line has increased profits the last three quarters. As a result, the issuer’s board of directors has increased dividends each of the last three quarters even though the stock price has stayed the same. The common stock’s yield will:
A. Decrease
B. Not be affected by the increased dividends
C. Increase
D. Increase if the profits continue to increase four consecutive quarters
C. Increase
Nice try! The correct answer was C.
The yield on common stock is computed by dividing the market price of common stock into the dividend. If the common stock price has not changed, but the dividend continues to increase, the yield will increase. For example, if the stock costs $14.90 and the dividend is $1, the yield is 6.7% ($1 divided by $14.90). If the stock stays at $14.90 and the dividend increases to $1.50, the yield is 10% ($1.50 divided by $14.90).
Which of the following is not considered a money market instrument?
A. CDs offered by banks to their depositors
B. Commercial paper
C. Repurchase agreements
D. T-Bills
A. CDs offered by banks to their depositors
An investor has three ABC 6% bonds and three XYZ 6.4% bonds. What is the difference in annual interest between the two positions?
A. $4
B. $48
C. $12
D. $24
C. $12
THREE BONDS
After spending 40 minutes on the phone listening intently to a RR from Omega Investments try to pitch a sale, Judy decided not to do business with this firm and asked to be placed on their “do-not-call” list. Based on this request, Omega Investments must:
A. Require that the request be submitted in writing before recording and honoring
B. Petition the Federal Government to add Judy to its do-not-call list
C. Honor the do-not-call request and update the list by the end of that business day
D. Record the request to be placed on the do-not-call list immediately and honor the request before 30 days elapse from the time of the request
D. Record the request to be placed on the do-not-call list immediately and honor the request before 30 days elapse from the time of the request
Tax exempt funds:
I Have a goal of current income
II Must have 90% of their income be tax-exempt from federal income tax
III May be exempt from state and local income tax only for certain shareholders
IV Have lower yields than funds with similar risks that are not tax-exempt
A. I, III, and IV
B. I, II, III, and IV
C. I and II
D. I, II, and III
A. I, III, and IV
Oops! The correct answer was A.
Tax-exempt funds invest in municipal securities that are exempt from federal income tax and, for shareholders who are residents of the issuing state, are usually exempt from state and local income tax. Such investments give current income but little potential for capital appreciation. Since the shareholders receive a tax advantage, yields on those funds are generally lower than yields on funds invested in corporate bonds (which offer no tax advantages). At least 80% of the portfolio income must come from tax-free issues.
Which of the following best describes the taxation of a loan against the cash value of a life insurance contract considered a modified endowment contract?
A. Taxable at an alternative minimum tax rate
B. Taxable at preferential rates
C. Tax-Free
D. Taxable at ordinary income rates and subject to a 10% penalty
D. Taxable at ordinary income rates and subject to a 10% penalty
Oops! The correct answer was D.
A modified endowment contract (MEC) is an overfunded life insurance contract. Money taken from a MEC in the form of loans, partial surrenders, or withdrawals, is subject to ordinary income tax plus, typically, a 10% IRS penalty, if the withdrawal is taken prior to age 59 1/2
A modified endowment contract (MEC) is
an overfunded life insurance contract. Money taken from a MEC in the form of loans, partial surrenders, or withdrawals, is subject to ordinary income tax plus, typically, a 10% IRS penalty, if the withdrawal is taken prior to age 59 1/2.
Which of the following relationships would exempt a registered representative from the prohibition against sharing in profits and losses in a customer account?
A. The customer is the representative’s father-in-law
B. The customer is an investment adviser
C. The customer is an accredited investor
D. The customer is a lending institution
A. The customer is the representative’s father-in-law
Excluded from the prohibition are the representative’s immediate family, defined as the representative’s parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the registered representative contributes directly or indirectly.
If your client is worried about interest rate risk, which security would you NOT recommend as an investment?
A. Growth fund
B. Long-term corporate bonds
C. Treasury bills
D. Common stock
B. Long-term corporate bonds
Interest rate risk pertains to the sensitivity of a bond’s price to fluctuations of interest rates. The longer the bond’s maturity, the greater its uncertainty and therefore volatility. T-bills are short-term. Common stock and growth (equity) funds are equities, not debt (bonds).
ABC is quoted at 15 - 16. What is the bid?
A. 16
B. 15 1/2
C. 1
D. 15
D. 15
In the secondary market, the customer sells at the bid price which is the lower of the two prices shown. The broker-dealer pays the bid price to the seller. If the investor were purchasing they would pay the ask price which is the higher of the two prices shown. The difference between the bid and ask is the spread. The narrower the spread the greater the number of shares are being traded. The larger the spread indicates a much more thinly trading market in that securities. One way to remember the bid and ask price is to realize that broker-dealers make money by buying low and selling high.
All of the following statements describe inflation, EXCEPT:
A. A decrease in the level of the PPI
B. An increase in the prices of goods and services
C. Erosion in the buying power of the dollar
D. An increase of actual dollars in the economy
A. A decrease in the level of the PPI
The PPI, otherwise known as the producer price index, measures inflation at the wholesale level. A decrease would signal either disinflation or deflation but never inflation.
Which of the following is NOT a money market instrument?
A. Commercial paper
B. Negotiable CDs
C. U.S. savings bond with 4 weeks until maturity
D. U.S. Treasury bill with 6 weeks until maturity
C. U.S. savings bond with 4 weeks until maturity
Money market securities are always short term, investment grade, and liquid. Savings bonds are NOT short term when issued and they are illiquid because they must be redeemed by the U.S. government; there is no secondary market for savings bonds. Treasury bills, commercial paper and negotiable CDs are money market instruments. When T-Bonds and T-Notes are less than 1 year to maturity they are considered money market securities.
George invested $30,000 in a variable annuity and selected the straight life payout option at the contract’s inception. The account currently contains 5,000 accumulation units with an average NAV of $12.00. What would George’s beneficiary receive if he died?
A. $0, since the contract has yet to be annuitized
B. $60,000
C. $30,000 minus any deferred sales charges and administrative fees
D. $0, since George has selected the straight life option
B. $60,000
Nice try! The correct answer was B.
If George were to die during the accumulation period, George’s beneficiary will receive the greater of the contributions into the account or the date of death value. We know George is still in the accumulation period because the question refers to his holdings as accumulation units. George invested $30,000, but the units are worth $60,000 (5,000 units x NAV of $12) and, therefore, his beneficiary will receive $60,000.
Which of the following statements BEST describes the correlation between age and risk tolerance?
A. Investments that involve a high degree of risk are not suitable for older investors since they are in developing industries that older investors never worked for, and therefore can’t properly evaluate the chances for success
B. Older clients typically have difficulty understanding the mechanics of investments and therefore need simpler, safe securities in which to invest
C. Older investors at some point need to live off their investment earnings, and therefore need a more stable principal account value to generate enough income for their needs
D. The older an investor gets, the greater the likelihood they will experience a bear market, so they should seek out less aggressive investments to avoid a market downturn
C. Older investors at some point need to live off their investment earnings, and therefore need a more stable principal account value to generate enough income for their needs
Oops! The correct answer was C.
Typically, the average investor is saving for a number of goals; the greatest being retirement. The purpose of this is to create enough of a nest egg that can generate a monthly income that the investor can live off. As investors near or enter retirement, they typically have an idea of how much money they will need to live comfortably. Sudden changes in income due to a loss of that nest egg can be catastrophic for older investors and, therefore, the majority of an older investor’s portfolio should be in lower risk securities that can meet the demands of income with minimum fluctuations.
What type of investment risk is due to inflation?
A. Timing risk
B. Market risk
C. Purchasing power risk
D. Business risk
C. Purchasing Power Risk
Sorry! The correct answer was C.
Purchasing power risk is the risk of inflation eroding purchasing power. Market risk is the risk that the entire market declines. Timing risk is the risk of buying a security just before it declines or selling it just before it appreciates. Business risk is the risk that a particular company will not have enough cash flow to cover its operating expenses.
Which of the following factors are valid reasons for an RR to suggest switching from the ABC Family of Funds to the PDQ Family of Funds?
I Ability to take a tax loss on the ABC position
II Better performance of the PDQ Family
III More investment alternatives available within the PDQ Family
IV Additional compensation earned by the RR as a result of the switch
A. I, II, and III
B. IV
C. I and II
D. II and III
A. I, II, and III
Oops! The correct answer was A.
Switching from one fund family to another may be justified based on a customer’s tax situation or the relative merits of each family’s offerings. The additional compensation earned by the RR never justifies this action. Be careful; if the switch cannot be justified, it may be considered churning, which is prohibited according to FIRNA.
Which of the following statements best describes the amount of money an investor receives when liquidating shares of an open-end fund?
A. Offering price plus any redemption fees, multiplied by the number of shares
B. Net asset value multiplied by the number of shares, minus any redemption fee
C. Next available price minus any commissions, multiplied by the number of shares
D. Bid price multiplied by the number of shares, plus a sales charge
B. Net asset value multiplied by the number of shares, minus any redemption fee
Sorry! The correct answer was B.
When an investor liquidates shares of his fund, he may have to pay a redemption fee. The amount of such a fee varies based on the fund. In order to calculate this, we must first know the gross redemption amount. Start with the net asset value and multiply it by the number of shares being redeemed. Then subtract any redemption amount from that number. The result is the net redemption amount that will be paid to the investor.
Which of the following insurance products is defined as a security?
A. Term life insurance
B. An annuity with a variable stream of income
C. An annuity with a fixed stream of income
D. An endowment policy
B. An annuity with a variable stream of income
Oops! The correct answer was B.
Any product whose description includes the word “variable” is considered a security. Variable product investments are held in the separate account and could fluctuate in value based on market conditions. The SEC requires that this be disclosed and a prospectus must accompany any offering of a variable product.
Which of the following firms is required to join SIPC?
A. A broker-dealer offering a full range of fixed and variable annuities, UITs, and mutual funds
B. An investment adviser with discretionary authority over customer accounts
C. A broker-dealer that trades only in investment grade bonds on an agency basis
D. An insurance agency selling variable annuities
C. A broker-dealer that trades only in investment grade bonds on an agency basis
Oops! The correct answer was C.
Firms exempt from SIPC membership include broker-dealers whose transactions are based exclusively on mutual funds, variable annuities, variable insurance, or unit investment trusts. Investment advisers are also exempt.
What is never an ownership right of common stockholders?
A. To subscribe to any new issues of stock in order to protect their proportionate share of the outstanding stock
B. To receive a fixed portion of the corporation’s earnings in the form of dividends
C. To receive their share of any residual assets upon the dissolution of the corporation
D. To vote for the directors of the corporation
B. To receive a fixed portion of the corporation’s earnings in the form of dividends
Nice try! The correct answer was B.
Dividends on common stock are never guaranteed; they are paid only when and if declared by the board of directors. Pre-emptive right is the right to subscribe to any new shares to protect percentage of ownership. Common stockholders vote on big issues, including capitalization issues and the board of directors. Common stock is called the junior security because it has the lowest (residual) claim to assets at bankruptcy.
Which of the following statements concerning money market mutual funds is the most accurate?
A. All money market funds must have a stable NAV of $1.00
B. No prospectus is required when soliciting the sale of these funds
C. These funds are typically sold with a 1% sales charge
D. These funds are often used by investors seeking a defensive investment posture
D. These funds are often used by investors seeking a defensive investment posture
Nice try! The correct answer was D.
Due to the conservative nature of their portfolios, money market funds are suitable for investors that have capital preservation as their primary investment objective, also described as a defensive investment posture. While most funds do maintain a $1.00 NAV, this is not guaranteed. The prospectus delivery rule applies to the sale of money market mutual funds as it would for any other type of mutual fund sale. Most money market funds are offered on a no-load basis.
Which of the following would most likely have the highest current yield?
A. 10-year AA-rated corporate bond
B. 11-year Kansas General Obligation Bond
C. 8-year B-rated corporate bond
D. 10-year T-bond
C. 8-year B-rated corporate bond
Oops! The correct answer was C.
On a maturity scale of 1 year to 30 years, all of the bonds described are about the same maturity. Therefore, the primary factor affecting their current yields will be the credit quality of the bonds. The lower the credit quality, the higher the yield. The T-bond is of the highest credit quality, while the AA-rated corporate is considered of very good quality. The B-rated corporate bond is a “junk” bond, which pays out a higher yield when compared to other bonds with a better credit quality.
Ownership in a corporation is represented by:
A. Common stock
B. Common stock and preferred stock
C. Common stock, preferred stock, and bonds
D. Common stock, preferred stock, bonds, and short-term debt obligations
B. Common stock and preferred stock
Sorry! The correct answer was B.
All stockholders collectively own the firm regardless of the type of stock they own. Therefore ownership in a corporation is represented by both common and preferred stock. Bondholders are creditors of the corporation, as are parties to whom the corporation owes short-term debt.
If FINRA membership is denied or granted subject to restrictions, the applicant can appeal the decision to which entities?
A
FINRA board
B
Review Subcommittee
C
Membership department
D
National Adjudicatory Council
D
National Adjudicatory Council
If membership has been denied or granted subject to restrictions, the applicant has 25 days after service of the decision to appeal to FINRA’s National Adjudicatory Council.
A person doing which two of the following would be considered bearish on the stock market?
I Buying calls
II Buying puts
III Selling puts
IV Selling calls
A
I and III
B
I and IV
C
II and IV
D
II and III
Nice try! The correct answer was C.
A person who is bearish on the stock market believes that stocks, in general, will decline in value. An investor could profit in a bear market by buying puts or selling calls.
C
II and IV
Which of the following statements correctly describes the difference between an economic recession and a depression?
A
An economic recession lasts at least 2 consecutive quarters and a depression lasts at least 6 consecutive quarters
B
A recession lasts more than 6 months and a depression lasts more than 24 months
C
An economic recession lasts at least 6 consecutive months and a depression lasts at least 8 consecutive months
D
A recession lasts at least 6 consecutive months and a depression lasts at least 25 consecutive months
A
An economic recession lasts at least 2 consecutive quarters and a depression lasts at least 6 consecutive quarters
Oops! The correct answer was A.
An economic recession is defined as a real decline in GDP lasting 2 consecutive quarters or longer and a depression is a real decline in GDP lasting 6 consecutive quarters or longer.
The management fee that a mutual fund pays to its investment adviser is part of:
A
The sales load
B
The operating expenses of the fund
C
A cost of the fund underwriter
D
A variable expense of the sponsor
Excellent!
The sales load is a distribution expense. Underwriters’ fees are a distribution expense and a portion of the total sales load. The management fee is an operating expense of the fund.
B
The operating expenses of the fund
John is a RR with ABC Brokers, he meets with a new customer, Jane, and tells her she need to immediately purchase $20,000 worth of XYZ stock. Which of the suitability standards did John violate?
A
John did not violate the suitability standards
B
Reasonable basis suitability
C
Quantitative suitability
D
Customer specific suitability
D. customer specific suitability
Oops! The correct answer was D.
It is the duty of the RR to make sure that the security is suitable for an investor based on her specific investment goals. Without performing any suitability measure for Jane, John violated the customer specific suitability requirement under FINRA regulation.
A bond is trading at a premium. Which yield is the lowest?
A
Yield to maturity
B
Nominal yield
C
Coupon rate
D
Current yield
A. yield to maturity
Oops! The correct answer was A.
The yield to maturity, or rate of return a current purchaser would receive if he held the bond to maturity is the lowest of the yields for a bond trading at a premium. Current yield would be in the middle and the nominal yield (coupon rate) would be the highest yield.
As a general rule, one would expect the highest price volatility with a:
A
U.S. Treasury Bill
B
Corporate subordinated debenture
C
Blue chip stock
D
Small cap emerging company stock
D
Small cap emerging company stock
Nice try! The correct answer was D.
Blue chip stocks are seasoned, large-size companies with a good track record. They are generally more stable. Fluctuations in interest rates could change the price of a debenture, but it wouldn’t NECESSARILY change as often as the value of small cap emerging company stock. These stocks in younger, relatively smaller companies generally have more risk. A slight change in management, products, sales, etc. could make a substantial difference in the price movement of the stock. Fluctuations in interest rates could change the price of a U.S. Treasury bill, but it wouldn’t change as often as the value of a penny stock.
Which of the following is NOT a valid exception to the IRS’ premature withdrawal penalty assessed on early withdrawals of IRA assets?
A
Financial hardship
B
A $10,000 down-payment on a first-time home purchase
C
Disability from a car accident
D
Medical expenses for Chemotherapy
A. financial hardship
Nice try! The correct answer was A.
Money held in retirement plans cannot be withdrawn prior to age 59 1/2 without penalty except for death, disability, purchase of first home (with a $10,000 lifetime limit), or to pay certain medical expenses or qualifying medical insurance premiums. While the penalty is waived in these cases, any taxable portion of the distribution is still subject to regular income tax. Financial hardship does not release the taxpayer from the penalty associated with a premature withdrawal.
Who is responsible for the nation’s monetary policy?
A
The U.S. Treasury
B
The Federal Reserve Board (FRB)
C
Congress
D
The President
B
The Federal Reserve Board (FRB)
Nice try! The correct answer was B.
The Federal Reserve Board (FRB) is responsible for the nation’s monetary policy.
What type of investment risk relates to the ability of the issuer to remain a profitable organization?
A
Economic risk
B
Business risk
C
Interest rate risk
D
Market risk
B. Business risk
Nice try! The correct answer was B.
Business risk occurs when the issuer is unprofitable or fails and the investor loses his money. Interest rate risk applies to outstanding bond prices versus interest rates. Market or systematic risk is the risk that the entire market declines.
What is the purpose of the Securities Investor Protection Corporation (SIPC)?
A
To protect customer assets in the case of broker-dealer bankruptcy
B
To protect broker-dealers against employee fraud or embezzlement
C
To guarantee the principal value of bank products
D
To protect customers against market declines
A. to protect a customer assets in the case of broker-dealer
Oops! The correct answer was A.
The Securities Investor Protection Corporation (SIPC) is a non-profit organization that insures customer assets lost due to the financial failure of a broker-dealer. When a broker-dealer becomes financially insolvent, SIPC will go in and attempt to recover customers’ securities positions. For those that cannot be located, SIPC has a fund to protect those customers.
Who may a broker-dealer charge for the cost of forwarding financial reports, proxies, and other issuer materials to customers?
A
no one, the broker-dealer is required to bear the cost
B
The transfer agent
C
The customer
D
The issuer
D. The issuer
Sorry! The correct answer was D.
The broker-dealer may charge the issuer. The broker-dealer is not permitted to charge the customer. The other two choices are distracters.
A customer of a broker-dealer purchases shares of a mutual fund through the broker-dealer. Under what circumstances may credit be extended on the shares?
I The shares are purchased through dividend reinvestment
II The customer has owned the shares for 30 days or more
III The broker-dealer arranges for a private loan
IV The broker-dealer gets less than 10% commission
A
II and III
B
I and IV
C
II
D
I and III
C II
The customer has owned the shares for 30 days or more
Sorry! The correct answer was C.
Credit may be extended on mutual fund shares held more than 30 days. However, credit may not be extended on the purchase of new mutual fund shares though a broker-dealer, and the broker-dealer may not try to get around the restrictions by arranging for loans by others.
Which of the following is NOT considered a prudent gift under Uniform Gift to Minors Act?
A
Cash in excess of $3,000 per year
B
Variable annuity
C
A mutual fund
D
Commodity future contracts
D. Commodity future contracts
Sorry! The correct answer was D.
Futures contracts are speculative instruments which are not defined as securities. UGMAs must be funded with securities and/or cash. Risky activity, such as margin, short selling, and uncovered options is not permitted.
An investor is only interested in buying securities that are backed by the U.S. Government. Which one of the following products does not carry a U.S. Government guarantee of principal?
A
GNMA fund
B
U.S. T-bill
C
Ginnie Mae pass through certificate
D
Treasury STRIP
A. GNMA fund (FUND!!!!!!)
Sorry! The correct answer was A.
Of the choices provided, only a GNMA fund is not backed by the U.S. Government. Ginnie Mae (Government National Mortgage Association) pass-through certificates and all securities directly issued by the Treasury, are considered to be backed by the full faith and credit of the Federal government. Remember, the U.S. Government does not guarantee any mutual fund, regardless of its holdings.
A U.S. Treasury bond issue is selling currently at 108.15. The nominal rate is 12% What is the market value of the bond?
A
$1,080.15
B
$1,008.15
C
$1,084.69
D
$1,081.50
C
$1084.69
Nice try! The correct answer was C.
A government bond is priced in points (one point = $10) and 32nds of points. A bond selling at 108.15 is selling at 108 15/32% of the par value of $1000. 15/32 = .4689. $108.469% of $1000 = $1084.69.
All of the following are true of management companies, EXCEPT:
A
The market price of the shares held in their portfolios are determined by supply and demand
B
The liquidation price is always higher than the fund’s NAV
C
They may continually trade the securities in their portfolios
D
If the value of the securities in their portfolios decrease, it will cause the NAV per share to decrease
B. The liquidation price is always higher than the fund’s NAV
Sorry! The correct answer was B.
This question does not specify whether the management company is open or closed end. Therefore, all of the answers are true regarding both open and closed end funds, except for the answer choice “the liquidation price is always higher than the current NAV.” The market price of the shares in their portfolio is determined by supply and demand for the shares, but the price for mutual fund shares is not determined by supply and demand. A mutual fund’s NAV per share is determined by dividing the fund’s NAV by the number of shares outstanding. Remember that for a mutual fund, the liquidation price is ALWAYS the NAV.
An investor wants to retain full control and ownership of his account during his life, but would like the assets to be distributed to his family as quickly as possible in the case of his demise. The account type that would best accomplish this goal is:
A
JTWROS
B
UTMA
C
TIC
D
TOD
D. TOD
A Transfer on Death (TOD) account is an individual account with a named beneficiary. Upon the death of the account holder, the assets in the account transfer directly to the beneficiary; in this way, the probate process is avoided.
A treasury bill does NOT have which of the following characteristics?
A
It has a maturity date of up to 1 year
B
It is a marketable issue that trades in the secondary market
C
It is sold weekly on a competitive bidding basis
D
It is sold at face value and pays interest quarterly
D. it is sold at face value and pays interest quarterly
Excellent!
T-bills are issued in maturities ranging from 4 weeks to one year. They do NOT have a coupon rate and do NOT pay periodic interest. They are purchased at a discount and mature at face amount. They are issued by the U.S. government through a weekly auction and trade in the secondary market.
A RR been found guilty by a Hearing Panel of violating FINRA Conduct Rules by misusing discretion in his customer’s account. To whom should the RR direct his first appeal of this decision?
A
The National Adjudicatory Council
B
His broker-dealer
C
The Supreme Court
D
The Securities and Exchange Commission
A. the national adjudicatory council
Sorry! The correct answer was A.
A Hearing Panel decision can be appealed within 25 days of the decision to the National Adjudicatory Council (NAC). Appeals of NAC decisions may be made to the SEC, and the Commission’s decision may be appealed to a federal court.
Which of the following is true regarding deferred compensation plans?
A
They are also called Keoghs
B
The employer must make annual contributions
C
The employer is not required to make contributions
D
They are funded with face amount certificates
B. the employer is not required to make contributions
Nice try! The correct answer was C.
The employer is not legally required to make any contributions. Keoghs are for self-employed individuals. Face amount certificates are no longer issued.
Maria has just inherited $300,000 from her Uncle’s estate. She is a 34-year old restaurant entrepreneur, has extensive stock market experience and a high tolerance for risk. She plans on taking this windfall and investing it in a winery that her fiancee is considering purchasing within the next few months. Until she can invest in the winery, the most suitable investment for these funds is:
A
An aggressive growth fund to maximize her potential returns
B
A high-yield bond fund to maximize her yield
C
An investment grade short-term bond fund
D
An index fund to minimize her costs
C. an investment grade short-term bond fund
Sorry! The correct answer was C.
Maria will only own this investment for a number of months, which is far too short of a time horizon to invest in equities. The volatility associated with a high-yield bond fund also makes it an inappropriate choice for an investor with an abbreviated time horizon.
Which of the following best describes the taxation of a loan against the cash value of a life insurance contract considered a modified endowment contract?
A
Taxable at preferential rates
B
Taxable at an alternative minimum tax rate
C
Tax-Free
D
Taxable at ordinary income rates and subject to a 10% penalty
D. taxable at ordinary income rates and subject to a 10% penalty
Nice try! The correct answer was D.
A modified endowment contract (MEC) is an overfunded life insurance contract. Money taken from a MEC in the form of loans, partial surrenders, or withdrawals, is subject to ordinary income tax plus, typically, a 10% IRS penalty, if the withdrawal is taken prior to age 59 1/2.
Which of the following statements regarding liability is false?
A
A corporate stockholder has limited liability
B
A general partner has unlimited liability
C
A corporation has limited liability
D
A limited partner has limited liability
false
c. a corporation has limited liability
Nice try! The correct answer was C.
The corporation has unlimited liability but its owners (stockholders) have limited liability. The most that an equity holder can lose is the amount of their investment. In a limited partnership, the general partner has unlimited liability, while the limited partners have limited liability.
The distributors of the ABC Strategic Investment Fund are interested in running an advertisement detailing the fund’s performance. According to the SEC, which of the following must be included in the ad?
A
It is a violation of SEC rules for mutual funds distributors to advertise performance
B
A telephone number or website from which the investor may obtain current performance information, if performance as of the most recent month-end is not in the ad
C
One period of below-average returns for each period of above-average returns shown
D
A graph showing the fund’s total return for each of the last ten years
B. a telephone number or website from which the investor may obtain current performance information, if performance as of the most recent month-end is not the ad
Nice try! The correct answer was B.
Material published that contains performance information must either include total return information current to the most recent month, ending seven business days prior to the date of use, or provide a phone number or a website address where an investor may obtain performance date current to the most recent month-end. If total return information is included in the ad, total returns for the most recent one-, five-, and ten-year periods (or the life of the fund, if shorter) must also be shown.
What is the name given to the entity that assists issuers in the process of underwriting and registering security offerings with the SEC as required under the Securities Act of 1933?
A
Syndicate member
B
Registered Representative
C
Investment banker
D
Selling group member
C. investment banker
Oops! The correct answer was C.
An investment banker assists in the process of underwriting and registering the securities offering with the SEC, as required by the Securities Act of 1933. An investment banker may be a broker dealer. Syndicate and selling group members are part of the underwriting team. Registered representatives work for broker-dealers.
Which of following is excluded from the operating expenses of an open-end management company?
A
Cost of sales literature
B
Custodian fee
C
Cost of semi-annual report
D
Auditor’s fee
A. cost of sales literature
Sorry! The correct answer was A.
The underwriter pays for marketing expenses. The investment adviser, custodian, transfer agent, and BOD are all operating expenses of the fund.
What type of security would a corporation issue to obtain leverage?
A
Preferred stock
B
Treasury stock
C
Bonds
D
Common stock
C. BONDS
Nice try! The correct answer was C.
Leverage is the using of another entity’s or person’s money to make money. When a corporation issues bonds it is engaging in leverage financing. The corporation must earn more than the cost of the loan. If not, and unable to pay interest on a timely basis or pay off principal at maturity, the corporation will be in default and perhaps forced into bankruptcy. The investor, lender, takes on this risk.
In which case would a broker-dealer have to register as an investment adviser?
A
The broker-dealer provides advice in the course of conducting business
B
When it publishes a newspaper column giving advice on an investment
C
The broker-dealer writes an advisory letter and makes no charge for this service
D
Using market timing for which it charges a separate fee
D
using market timing for which it charges a separate fee
Nice try! The correct answer was D.
Any entity in the business of giving investment advice for a fee must register as an investment adviser. The newspaper column and advisory letter are not customer-specific. BDs conducting their normal business are exempt from the requirement to register as investment advisers.
Which of the following is not true regarding the predispute arbitration clause signed by associated persons of member firms?
A
All associated persons filing Form U4 must be given a statement providing detailed disclosures regarding the clause
B
It includes a reference to the location(s) where an associated person may obtain instructions on appealing the decision of a FINRA arbitration panel
C
It discloses that associated persons of member firms are not required to arbitrate in cases involving sexual harassment
D
It discloses that associated persons of member firms are not required to arbitrate in cases involving employment discrimination
The decisions of FINRA arbitration panels are considered final and binding; there are no appeals.
B
it includes a reference to the location(s) where an associated person may obtain instructions on appealing the decision of a FINRA arbitration panel
Sorry! The correct answer was B.
The Form U4 filed by each applicant for registration as an associated person of a member firm includes a predispute arbitration clause. By signing the U4, the applicant is agreeing to arbitrate, rather than litigate, in almost all disputes between the individual and their member firm. FINRA requires that member firms provide written disclosures about this clause and its provisions to each applicant at or before the time they submit their U4. Among other disclosures, the member firm must disclose that associated persons are not bound to arbitration for disputes involving discrimination or sexual harassment.
Mutual funds do NOT have which of the following characteristics?
A
The securities purchased by the managers are sent to the investors
B
Investors pool their money
C
They allow individuals to buy into a complex portfolio that they could not obtain on their own
D
Investors have investment managers, hired on a full-time basis, to handle the investment activities such as purchasing additional securities
A.
the securities purchased by the managers are sent to the investors
Sorry! The correct answer was A.
Mutual funds hold all purchased securities in their investment portfolio. Investors own an undivided interest (a pro rata ownership) in the value of all those securities, not the securities themselves. The actual securities, if not in book-entry form, are held by a custodian for safekeeping.
Bill purchased a nonqualified annuity with a separate account and invested $45,000 over the years. At retirement, the annuity is worth $450,000. If he takes a full cash distribution for the entire amount, how will this be taxed?
A
The entire withdrawal is taxed at ordinary income rates
B
10% is taxed as ordinary income while the remainder is considered a return of capital and therefore is not taxed
C
The entire withdrawal is taxed as a long-term capital gain
D
90% is taxed as ordinary income while the remainder is considered a return of capital and therefore is not taxed
D
90% is taxed as ordinary income while the remainder is considered a return of capital and therefore is not taxed
For 8 years, a parent has been contributing $400 per month to a 15-year contractual plan. Now the parent wants to send $250 per month to a daughter to help with college expenses. The most appropriate alternative, if the discretionary amount of money remains at $400 per month, would be:
A
Keep making the $400 per month contractual plan contribution and establish an automatic withdrawal plan for the daughter of $250 per month
B
Terminate the $400 per month contractual plan and give the daughter in college $250 per month
C
Keep making the $400 per month contractual plan contribution and then withdraw $250 per month from the contractual plan for the daughter
D
Reduce the $400 per month contractual plan investment by $250 and send that amount directly to the daughter
D
reduce the $400 per month contractual plan investment by $250 and send the amount directly to the daughter
if the parent send $250 directly to the student, it is the least expensive method. sending $150 monthly continues the investment plan.
Which of the following statements is false regarding SIPC?
A
The date on which the broker-dealer is declared insolvent is the date of security valuation for customer claims
B
Any customer claims in excess of the SIPC reimbursed amount are equal in status to general creditors
C
For reimbursement purposes, an IRA stands alone as a separate customer
D
SIPC coverage is for cash, securities, commodities, and futures contracts
D
SIPC coverage is for cash, securities, commodities, and future contracts
SIPC reimburses customer losses on cash and securities only, not on commodities or futures
Which of the following statements concerning the taxation of mutual fund shares is correct?
A
Mutual fund holdings typically grow tax-deferred
B
Exchanges within a family are not subject to taxation
C
The IRS sets distribution standards which qualify a fund as regulated under the U.S. tax code
D
Dividends from a mutual fund are not taxable if reinvested
C
The IRS sets distribution standards which qualify a fund as regulated under the U.S. tax code
Sorry! The correct answer was C.
The taxation of mutual funds is covered under Subchapter M of the Internal Revenue Code. Exchanges within a family of funds is considered a taxable event and mutual fund holdings do not grow tax-deferred. Mutual fund dividends are considered taxable, even if reinvested by the shareholder.
What type of investment risk is due to inflation?
A
Business risk
B
Purchasing power risk
C
Timing risk
D
Market risk
B
Purchasing power risk
Nice try! The correct answer was B.
Purchasing power risk is the risk of inflation eroding purchasing power. Market risk is the risk that the entire market declines. Timing risk is the risk of buying a security just before it declines or selling it just before it appreciates. Business risk is the risk that a particular company will not have enough cash flow to cover its operating expenses.
According to SEC and FINRA rules, which of the following are true concerning the delivery of a prospectus?
I If electronic media is used to disseminate the prospectus, it must have all the information required in paper-based media
II For a broker-dealer to show evidence of delivery for a prospectus through electronic media, they may require a client to e-mail a response that the electronic prospectus was received
III Evidence of delivery through electronic media may be disseminated by fax
A
I and II
B
II and III
C
I, II, and III
D
I and III
C
I, II, and III
Oops! The correct answer was C.
Electronic media must have equivalent material and all required information as required in paper-based media. If the information in the paper-based media is required to be in a certain order, then the electronic-based media must follow the same order. Broker-Dealers must have policies and procedures in place to make sure that the delivery requirements under the federal securities laws are met. The broker-dealer must show evidence of delivery through electronic media and may obtain client’s consent to deliver required information through electronic-based media or require client to provide notice that the information was received, such as, electronic mail (E-mail), or confirmation that the material is accessed, downloaded or printed. Broker-Dealers in order to show evidence of delivery through electronic media may disseminate required information by fax or facsimile methods.
Continuous investments of new money combined with reinvestment of dividends and capital gains is a method for accomplishing an investment objective of:
A
Safety of capital
B
Income
C
Growth
D
Liquidity
C
Growth
Sorry! The correct answer was C.
This is the essence of compounding, or money making more money on money, and value increasing. Continuous investing and reinvesting of profits do not relate to income, safety, or liquidity. Continuous investing and reinvesting for profit relates to capital appreciation.
A municipal bond has a yield of 4.2%. Calculate the taxable equivalent yield for an investor in the 31% tax bracket.
A
6.09%
B
13.02%
C
2.90%
D
4.20%
A
6.09%
Nice try! The correct answer was A.
To find the taxable equivalent yield, we take the municipal yield and divide it by 100% - the investor’s tax bracket. 4.2%/100% - 31% = 4.2%/69% or .609. The taxable equivalent yield is 6.09%. This is the yield that should be used when comparing this municipal bond to taxable investment alternatives.
Which retirement plan was created specifically for self-employed persons and their eligible employees?
A
401(k)
B
403(b)
C
457
D
HR-10
D
HR-10
Oops! The correct answer was D.
Keogh HR-10s (and also SEPs) are for self-employed such as sole proprietorships and partnerships. 401(k)s are for corporations. 457s are for governmental employees. 403(b)s are for schools and nonprofits.
Mr. Jones invested $10,000 into the ABC Aggressive Growth open-end investment company. His objective is long-term growth. Which of the following is (are) true concerning the ABC Fund?
I If Mr. Jones invests another $5,000 into ABC Fund, the NAV per share will increase
II If Mr. Jones redeems $5,000 of his existing shares, ABC’s NAV per share will not be affected
III If Mr. Jones elects to take his dividends in cash, ABC’s NAV per share will decrease
IV If Mr. Jones elects to re-invest his distributions, ABC’s NAV per share will increase
A
I, III, and IV
B
II and III
C
III
D
II
B
II and III
Excellent!
When the fund receives new money, they simply issue more shares to equal the new investments, so there is no change in NAV per share. When investors redeem shares, the fund sends them the NAV per share and cancels their shares. The fund has less assets and fewer shares outstanding. The net result is no change in the NAV per share. When the fund distributes a dividend, it has fewer assets and the same number of shares outstanding, so the fund’s NAV decreases and the NAV per share decreases. Note: If investors choose to reinvest a dividend, the fund has more assets but issued more shares on the reinvestment, so the NAV remains the same, similar to a new purchase
J.T. Smith, a broker dealer trainee, has just passed the Ser 6 with a 94%. Many fellow trainees are scheduled to take the test in the near future and are anxious to talk to J.T. about the testing experience. J.T. may:
A
Only discuss her testing experience with employees who are already licensed
B
Share general impressions of the exam with her fellow trainees, as long as she does not provide them with specific questions
C
Critique the effectiveness of the firm’s test prep program with a training manager
D
Share general impressions of the exam with the training manager, as long as specific questions are not provided
C
Critique the effectiveness of the firm’s test prep program with a training manager
Oops! The correct answer was C.
Candidates are not permitted to discuss exam content with anyone, including a principal. The test taker may evaluate the effectiveness of the firm’s training program.
Earl has 60% of his assets invested in an oil services company that relies on domestic oil production for its revenue. Due to pressure from environmental groups, Congress is considering passing a law prohibiting all domestic oil drilling. What risk is Earl extremely vulnerable to at this time?
A
Systematic risk
B
Legislative risk
C
Environmental risk
D
Timing risk
B
Legislative risk
Sorry! The correct answer was B.
Earl is susceptible to legislative risk. This is the risk that a law change or any act of Congress will damage the value of a business into which someone is invested.
When contributions are deductible and earnings are deferred in a qualified plan, distributions are taxed as:
A
Alternative minimum tax preference items
B
Capital gains
C
Ordinary income
D
Dividends
C
Ordinary income
Oops! The correct answer was C.
Withdrawals from qualified plans funded by deductible contributions are taxed as ordinary income. Cost basis is zero.
An investor has an option to sell 100 shares of ABC stock at $50 per share. The investor has a:
A
Call option
B
Stock warrant
C
Put option
D
Stock right
C
Put option
CORRECT!
A put option gives the buyer the right to sell stock at a stated price, while a call option gives the buyer the right to buy stock at a stated price. Rights are short-term options to buy and warrants are long-term options to buy.
The investment adviser to a mutual fund is generally compensated by:
A
Part of the underwriter’s concession
B
An annually negotiated fee
C
A percentage of the average net assets of the fund
D
A base salary plus commission
C
A percentage of the average net assets of the fund
Nice try! The correct answer was C.
The investment adviser’s management fee is based upon a percentage of net assets under management. The adviser’s compensation is a direct operating expense (included in the NAV calculation) while the underwriter’s concession is a marketing expense included in the sales charge.
If an existing stockholder fails to subscribe for new shares under the terms of a rights offering, the stockholder’s proportionate interest in the corporation is:
A
Reduced
B
Unaffected
C
Increased
D
Augmented
A
Reduced
Nice try! The correct answer was A.
The number of a stockholder’s shares divided by the total number of shares outstanding equals the stockholder’s percentage ownership of the company. Since this stockholder’s number of shares will remain the same, but the total number of outstanding shares will increase, this stockholder’s percentage of company ownership will decrease.
Which of the following fund types would be an appropriate investment choice for an investor wishing to hedge against inflation?
A
A money market fund
B
A government securities fund
C
A precious metals fund
D
A municipal bond fund
C
A precious metals fund
Nice try! The correct answer was C.
Traditionally, precious metals have been a haven for investors seeking refuge from inflation. Over the course of history, when inflation has gone up, so has the price of precious metals. For example, in the early 1980s inflation was in the double digits and gold increased to approximately $900 an ounce. In the late 1990s, when inflation was around 1.5% percent, gold was roughly $250 an ounce. An investor who wishes to have some inflation protection in his portfolio may purchase a precious metals fund specifically for this reason. The fixed income securities in the other three choices all have some degree of inflation risk.
What may be purchased on margin?
I Registered mutual fund shares
II Closed end funds in the primary market
III Securities admitted to trading privileges on a national exchange
IV All NASDQ stocks
A
I, II, III, and IV
B
II and IV
C
III and IV
D
I and III
C
III and IV
Oops! The correct answer was C.
Since mutual fund shares, are a continuous new issue, they may not be purchased on margin. NASDAQ securities and NYSE securities are marginable securities. New issues, including closed end funds, are not marginable.
Fund A’s quote is $9 bid and $10 ask. Fund B’s quote is $4 bid and $4.30 ask. From these two quotes, we can determine that funds are:
A
Fund A is either an open-end or closed-end investment company and fund B is closed-end
B
Fund A is a closed-end investment company and fund B is open-end
C
Fund A is an open-end investment company and fund B is closed-end
D
Fund A is a closed-end investment company and fund B is either open-end or closed-end
D
Fund A is a closed-end investment company and fund B is either open-end or closed-end
Sorry! The correct answer was D.
If there is greater than an 8-1/2% spread between the bid (NAV) and ask (POP), the company can only be closed-end since an open-end company has a maximum sales charge of 8-1/2%. If there is less than an 8-1/2% spread, the company could be either open-end or closed-end. Fund A’s ask price of $10 minus a bid of $9 equals a $1 difference. The $1 divided by the ask price of $10 equals 10%. Fund B’s ask is $4.30 minus its bid of $4 equals a sales charge of $.30 cents. The sales charge of $.30 divided by the ask of $4.30 equals a sales charge of 7%. If the ask is less than the NAV, it could only be closed-end since open-end companies do not sell below their NAV. Any quote could be closed-end, but a company could be open-end only if the sales charge is 8-1/2% or less.
Which of the following is the leading SRO governing broker-dealers?
A
CBOE
B
OCC
C
FINRA
D
SEC
C
FINRA
Oops! The correct answer was C.
FINRA is the leading SRO (self-regulatory organization) that oversees its member broker-dealers. In July of 2007, the NYSE and the NASD regulatory bodies merged to create FINRA (Financial Industry Regulatory Authority). The OCC is the options clearing corporation which is an equities derivative clearing organization. The CBOE is the Chicago Board Options Exchange. The SEC is the Securities Exchange Commission which oversees securities exchanges, securities brokers and dealers, investment advisers, and mutual funds.
Upon receipt of a properly completed ACATS request, a carrying member firm must:
I Validate all positions within one business day of receipt
II Validate all positions within three business days of receipt
III Complete transfer of transferrable assets within one business day of validation
IV Complete transfer of transferrable assets within three business days of validation
A
II and III
B
II and IV
C
I and IV
D
I and III
C
I and IV
Nice try! The correct answer was C.
Broker-dealers use the Account Confirmation and Transaction System (ACATS) to facilitate transferring a customer’s account from one member firm to another. The receiving broker-dealer has the customer fill out and sign a form listing all of their positions at the current (carrying) firm. The BD then submits the request through ACATS to the carrying firm. The carrying firm has one business day from receipt to either validate that the account information and positions are correct or to notify the requesting firm of any discrepancy. Once the account has been validated, the carrying firm must transfer the assets to the new firm. Some positions, such as shares of proprietary funds of the carrying firm, may not be transferrable. The carrying firm must notify the requesting firm of these positions and must complete transfer of all transferrable assets within 3 business days of validation.
With regards to an open-end management company, which of the following is NOT synonymous with the term “sponsor”?
A
Broker-dealer
B
Underwriter
C
Distributor
D
Wholesaler
A
Broker-dealer
Nice try! The correct answer was A.
Wholesaler, distributor, underwriter, and sponsor are all terms used to describe the same entity. This is the “person” who is a conduit between the fund and the broker-dealer community and/or individual customers. All four of these designations may be used to designate the same “person.”
Which preferred stock has a minimum dividend but not a maximum?
A
Convertible
B
Cumulative
C
Straight
D
Participating
D
Participating
Sorry! The correct answer was D.
In a cumulative preferred, dividends that are not paid will accumulate and could be paid later. Participating preferred stock may pay an extra dividend along with the fixed dividend. The fixed dividend is the minimum. Convertible preferred converts into a set number of common stock. Straight preferred has no extra features.
