For Exame Flashcards
Study (129 cards)
Analysis: Beta
An investor holds an equity position that outperforms the market when the overall market advances but underperforms the market when the overall market declines. Which of the following statements are true?
A) The equity position has an alpha less than 1.
B) The equity position has an alpha greater than 1.
C) The equity position has a beta less than 1.
D) The equity position has a beta greater than 1.
D) A security or portfolio with a beta greater than 1 will likely experience higher highs (outperform the market) and lower lows (underperform the market). Beta is a measurement of the volatility of an asset relative to the general market.
Alternative Inv: DPP:
Your firm is distributing units of a direct participation program (DPP) to several high-net-worth clients. Fred maintains a discretionary account with you. You may purchase these units for Fred’s account
A) with prior written permission from your supervisor.
B) after informing him that he needs to send in his payment within three business days.
C) after receiving his written consent.
D) once you have established that these securities are suitable for him.
C) A registered representative may not use standing discretion to purchase non-traditional instruments in a customer account. Because of the heightened suitability standards applicable to products such as direct participation programs, the client must provide advance written consent when purchasing these products.
A client will be making a down payment on a new home in six months and seeks the advice of her registered representative on the best way to invest funds. The registered representative is most likely to recommend a(n)
A) exchange-traded note.
B) money market fund.
C) hedge fund.
D) six-month CD.
Suitability/Customer recommendations:
The registered representative would likely recommend the six-month certificate of deposit (CD), which would return a higher yield than the money market fund. The hedge fund and exchange-traded note are not liquid investments and would not be appropriate choices for this client.
A new client has opened an options account at a broker-dealer. She must sign and return the Options Agreement
A) within 15 days of account approval.
B) within 10 days of placing her first trade.
C) before placing her first trade.
D) at least 15 days before account approval.
Regs: FCF - Options Regs/Disclosures
The Options Agreement must be signed and returned to the broker-dealer within 15 days of account approval. Note that a customer can actually trade in the account (for up to 15 days) before having signed and returned the Options Agreement.
Debt: Bond Conversion
When it is more advantageous for an investor to convert their bond into the underlying common shares rather than redeem their bond pursuant to a call notice, the likely result is (a)
A) risk arbitrage.
B) forced conversion.
C) leveraged buyout.
D) conversion parity.
Debt:
A forced conversion will occur when the call price of the bond is less than the market value of the underlying common stock received upon conversion.
Regulation NMS is intended to assure that investors
A) do not trade on material non-public information.
B) have long positions in the securities they place orders to sell.
C) receive audited financial statements from their broker-dealers each year.
D) receive the best price executions for their orders by encouraging market competition.
Regs: (Reg NMS)
This is the primary objective of Regulation NMS. NMS means National Market System. It was established in 2005 to foster competition among markets and among individual client orders.
National Market Systems
Options (Regs): Options Regs/disclosure
Sales materials for options distributed by a broker-dealer must include which of the following disclosures?
A) “Options trading is best suited for high-net-worth and accredited investors”
B) “Options may not be suitable for all investors”
C) “Options are very speculative products and should only be traded by investors who have a high-risk tolerance”
D) “Options trading can result in significant financial losses, so investors should be mindful of these important financial risks”
Options (Regs):( Flashcard front – Options Regs/disclosure)
All options sales material must include the disclosure “Options may not be suitable for all investors”.
Analysis: balance sheet dividend effect
Hank Industries is paying a cash dividend to stockholders of record on May 20. Which of the following is not true?
A) Net worth declines
B) Current liabilities decline
C) Retained earnings are unchanged
D) Current assets decline
When a corporation pays a cash dividend, both assets & liabilities decline, meaning there is no change to net worth. Dividends payable is a current liability that will decline once the dividend is paid. Cash is a current asset, and upon paying the dividend, cash and therefore, current assets, will also decline. The firm’s net worth is unchanged.When a corporation pays a cash dividend, both assets & liabilities decline, meaning there is no change to net worth. Dividends payable is a current liability that will decline once the dividend is paid. Cash is a current asset, and upon paying the dividend, cash and therefore, current assets, will also decline. The firm’s net worth is unchanged.
Regs or Customer Accounts: (options) for a client that has died
A registered representative has received notification of the death of one of his customers, a long-standing client for many years. At the time of learning of the death, the client had a pending sell limit order with the registered representative. The registered representative should now
A) liquidate all open positions in the account and forward all proceeds to the trusted contact on the account.
B) notify his supervisor of the death and proceed to liquidate all open positions in the account.
C) execute the order immediately and then freeze the account.
D) cancel the order immediately and then freeze the account.
Regs or Customer Accounts:
When a customer passes away, any open orders should be canceled immediately, and the account should be frozen.
Trading markets: trading ticket errors
Jack has entered the wrong account number on an order memorandum. Jack should
A) notify the customer.
B) notify his supervisor.
C) notify FINRA.
D) place the order in the error account.
Trading markets: (Flashcard front – trading ticket errors)
In this situation, Jack should notify his supervisor of the mistake. He is not authorized to access the error account on his own.
Regs: A registered representative has a client who is a CPA, and this client is offering, for a fee, to direct some of her accounting clients to the registered representative for potential participation in an upcoming IPO the firm will be a managing underwriter on. May the broker-dealer compensate the CPA for these leads?
These types of compensation arrangements are known as “finders fees”, and are permitted, even if the individual (the CPA in this case) is not FINRA registered. Any fees paid should be in cash only, and represent a flat or hourly fee, and not be tied to the success of any deals or transactions. If the individual is FINRA registered, the fees may be commission-based.
A registered representative has a client who is a CPA, and this client is offering, for a fee, to direct some of her accounting clients to the registered representative for potential participation in an upcoming IPO the firm will be a managing underwriter on. May the broker-dealer compensate the CPA for these leads?
A) No, the broker-dealer cannot make any compensation arrangements with the CPA, as such relationships are considered conflicts of interest.
B) No, these types of compensation arrangements are prohibited by FINRA rules.
C) Yes, but the CPA would need to be a FINRA-registered person in order to receive any such compensation, often called a finder’s fee.
D) Yes, but any compensation must be in the form of cash (not securities), and it should only be a flat or hourly fee, and not tied to the success of any deals.
Government Issues: T Bills
These types of compensation arrangements are known as “finders fees”, and are permitted, even if the individual (the CPA in this case) is not FINRA registered. Any fees paid should be in cash only, and represent a flat or hourly fee, and not be tied to the success of any deals or transactions. If the individual is FINRA registered, the fees may be commission-based.
Which of the following securities are quoted on a discounted yield basis?
A) Treasury bill
B) Treasury bond
C) 25-year convertible debenture
D) 20-year public-purpose municipal bond
Busniess Development Co.
Government Issues: FCFF - T Bills
Treasury bills are a type of short-term zero-coupon security and make their only payment to investors at the time of maturity. For this reason, they are quoted on a discount yield basis, meaning the percentage discount they are trading off of face value.
Which of the following statements best describes a business development company?
A) It is an investment vehicle that takes positions in mature companies with a strong record of earnings and dividends.
B) It is an entity typically organized as an open-end investment company.
C) It is usually organized as a closed-end investment company that takes positions in small and mid-sized companies.
D) It is an investing entity that purchases interests in companies that recently declared bankruptcy and proceeds to sell these businesses out of their portfolios at substantial profits and distribute the cash flows from these sales to investors.
Alternative INV: FC front. BDC
A business development company is typically organized as a closed-end investment company, with shares that are publicly traded. They invest in small and mid-sized businesses, by either taking equity positions or providing loans. Like traditional investment companies, they must pay out at least 90% of taxable income to investors to avoid taxation, and they usually pay dividends to shareholders either monthly or quarterly.
A broker-dealer is creating a sales and marketing script, to serve as the basis for an upcoming seminar to be delivered by firm personnel. At least 100 retail clients will be invited to join the seminar. According to FINRA rules, this script
A) is considered retail communication and must be approved by a principal prior to use.
B) must be filed with, and approved by, FINRA at least 10 days prior to the delivery of the seminar.
C) may be used without principal approval provided no specific recommendation or advice is provided during the seminar.
D) is considered institutional communication and must be approved by a principal prior to use.
Regs: FCF - Sales/Advertising Requirements
A sales script will be considered retail communication if it is distributed or made available to more than 25 retail investors within a 30 calendar-day period.
Regs: FCF - Sales/Advertising Requirements
A sales script will be considered retail communication if it is distributed or made available to more than 25 retail investors within a 30 calendar-day period.
15) On January 1st, an investor buys 1 XYZ Apr 50 call at 4 and sells 1 XYZ Apr 50 put at 2 1/2. Both options expire unexercised. What are the tax consequences for the investor?
A) $400 gain on the call, $250 gain on the put
B) $400 loss on the call, $250 loss on the put
C) $150 net capital gain
D) $150 net capital loss
A highly leveraged company
Options:
loses When an investor purchases an option and it expires unexercised the investor the premiums. Therefore, there is a $400 loss on the call purchased and a $250 gain on the put sold for a net loss of $150.
16) A company that is highly leveraged has as the smallest portion of its capitalization
A) debentures.
B) convertible debentures.
C) preferred stock.
D) common stock.
Analysis: FCF Leverage
A highly leveraged company means that the company has taken on lots of debt and raises the smallest portion of capital from its equity, or common stock.
Options (spreads): Calendar Spread
A variable annuity contract held by an investor is set to annuitize in the next 30 days. When this occurs,
A) accumulation units will be converted into a variable number of annuity units.
B) annuity units will be converted into a fixed number of accumulation units.
C) annuity units will be converted into a variable number of accumulation units.
D) accumulation units will be converted into a fixed number of annuity units.
Equities: FCF -Variable Annuity Characteristics
When a variable annuity contract is annuitized, the accumulation units are converted in a fixed number of annuity units. The value of these annuity units will fluctuate from month to month, providing the investor with the ‘variable’ return which is typical of these products.
In July a customer creates a horizontal spread by purchasing 10 XYZ OCT 50 calls and by selling 10 XYZ August 50 calls. Which of the following statements is true concerning this strategy?
A) This is a straddle
B) This is a calendar spread
C) This is a dollar spread
D) This is a combination
Options (spreads): FC Front Calendar Spread
This is a calendar spread because the strike prices are the same and only the expiration dates are different.
A registered representative receives an order from a retail customer to purchase a security that is not currently on the firm’s recommended list. The registered representative
A) may accept the order but must mark the order “solicited”.
B) will accept and execute the order, marking the order memorandum “unsolicited”.
C) may not accept the order, explaining that the firm does not follow the security.
D) must receive written approval from his supervisor prior to accepting the order.
Trading Markets: Ticket Requirements
A registered representative may accept this order and must mark the order “unsolicited”.
Business development companies are required to pay out at least 90% of their taxable income to investors in order to avoid paying federal income taxes. Note that this question is asking for which statement is “not” accurate.
Alternative INV: FC Front - BDC
Which of the following is not a characteristic of a business development company (BDC)?
A) They provide the platform for non-accredited investors to invest in emerging businesses
B) They must pay out at least 50% of their taxable income to investors to avoid federal taxation.
C) They take equity positions in financially troubled businesses
D) Typically organized as a closed-end investment company
Suitability/ Customer Recommendations:
Alternative INV: BDC
Business development companies are required to pay out at least 90% of their taxable income to investors in order to avoid paying federal income taxes. Note that this question is asking for which statement is “not” accurate.
An individual has holdings in three different fund families. A purchase of shares in a fourth family may
A) may not be combined with the holdings of the three existing funds for breakpoint considerations.
B) be aggregated with the holdings of the three existing positions to qualify for breakpoints.
C) qualify for breakpoint consideration if the individual signs a backdated letter of intent.
D) only be executed under a 13-month letter of intent.
Suitability/ Customer Recommendations:
Investors may not use their holdings in different fund families to qualify for breakpoints in other funds.
A financial institution buys $90,000 of 8%, 20-year revenue bonds. For book purposes, the institution uses straight-line accretion, but for tax purposes the institution uses cost. The bonds are sold after three years for $99,000. What will be the taxable gain?
A) 7500
B) 5000
C) 9000
D) 3000
Debt: FC Front: Bond Sale Taxable Gain or Loss
For tax purposes, the institution uses the cost basis, which is the price at which it purchased the bonds - $90,000.
They sold the bonds for $99,000 with a $90,000 tax basis, yielding a taxable gain of $9,000.
The yields on private label, or non-agency CMOs, can be higher than the yields on agency CMOs, as the underlying collateral will be more speculative, or less secure, than a government agency guarantee.
Alternative INV: – CMO characteristics
Regarding CMOs, which of the following statements is correct?
A) CMOs carry no interest rate risk if they are backed by U.S. government agency securities
B) The yields on private-label CMOs can be higher than the yields on agency CMOs owing to the characteristics of the underlying collateral
C) The interest payment on an agency CMO is taxable at the federal, state, and local levels, whereas the interest payment on a private label CMO is taxable at the federal level only.
D) All CMOs are backed by the federal government.
Alternative INV: FC Front – CMO characteristics
The yields on private label, or non-agency CMOs, can be higher than the yields on agency CMOs, as the underlying collateral will be more speculative, or less secure, than a government agency guarantee.
An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 81⁄2 % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar)
POP = (NAV/ 100% - SC%) = $10.30/.915 = $11.26 SC = POP NAV = .957
Total Sales Charge = .957 x 1000 shares = $957
POP - (100% - 8.5% = 91.5%) (10.30 / 91.5 = 11.26 SC% ) = POP - Nav = .957 X 1000 = $957